Financial results exhibit stress

The quarterly data proved a mixed bag with retail-focused private banks reporting decent numbers and corporate lenders below par results on asset quality concerns

The banking sector remained under pressure due to a variety of reasons like high amount of bad loans, higher provisioning for future defaults and tepid loan growth, showed the financial results declared by lenders for quarter ended September 30. But retail-focused banks continued to report steady numbers.

“Business of banks has been low and emanated more from the retail segment and less from industry and services. This reflected in their financial performance numbers. Results of 30 banks, excluding SBI, showed that Q2FY17 remained stressful in terms of growth in net interest income (NII) and profits. Gross NPAs are now around Rs 3.66 lakh crore for these banks,” said Care Ratings.

State Bank of India (SBI), the country’s largest lender that reported its numbers on Friday, disappointed with a near 35 per cent drop in net profit for Q2 due to steep YoY rise in provisions and contingencies. Net profit declined by 34.56 per cent to Rs 2,538 crore in Q2FY17 from Rs 3,879 crore in Q2FY16. Similarly, ICICI Bank, the country’s largest private sector lender, reported a 2.37 per cent rise in net profit to Rs 3,102 crore for Q2 as it set aside huge amounts as provisions for future defaults. Fresh slippages for ICICI Bank stood at Rs 8,000 crore during Q2.

SBI’s total slippages increased to Rs 11,900 crore in Q2 against Rs 10,800 crore in Q1. According to SBI management, around 65 per cent of the slippages emerged from large and mid-corporate advances. SBI retained its FY17 slippages guidance at Rs 40,000 crore implying Rs 20,900 crore of slippages in H2 against Rs 19,100 crore during H1. Corporate slippages stood at Rs 6,900 crore, 70 per cent of which came from the watch list. The bank’s watch list declined by 17 per cent QoQ to Rs 26,000 crore from Rs 31,000 crore disclosed in Q1. SBI said it expected further decline of Rs 6,000 crore to Rs 7,000 crore by FY17-end. NIMs dipped 3 basis points QoQ to 2.8 per cent in Q2 due to decline in domestic margins to 3.05 per cent against 3.09 per cent in Q1. SBI’s loan growth was 7 per cent YoY with retail loans growing 20 per cent. According to Arundhati Bhattacharya, SBI chairman, the bank is targeting a loan growth of 10 per cent for FY17.

Parag Jariwala, VP (institutional research), Religare Capital Markets, said, “We maintain ‘sell’ for SBI. We now build in a lower hit on the restructured book and lower NPAs, but pare our FY17-FY19 earnings estimates by 3-20 per cent to incorporate losses incurred by associate banks in H1FY17. With these revisions upon rollover to September 17, our target price rises to Rs 235 from Rs 200. Our target multiple remains at 1.5 times the consolidated absolute book value.”

Punjab National Bank, after witnessing sharp deterioration in the asset quality in the past few quarters, reported some stability in NPA numbers during Q2FY17. Slippages were under control and GNPAs did not go up, which is a positive development. The total slippages declined to Rs 6,200 crore, which included Rs 5,100 crore fresh slippages and Rs 1,100 crore debit to existing NPA accounts, from Rs 9,200 crore in Q1. Cash recovery, upgradation and write-offs stood at Rs 2,900 crore, Rs 1,900 crore and Rs 1,600 crore, respectively. Given the lower slippages, GNPA declined to 13.6 per cent from 13.8 per cent in Q1. Reported coverage ratio was stable QoQ at 37 per cent. Restructured standard assets declined to Rs 18,000 crore (4.4 per cent of loans) against Rs 18,900 crore in the last quarter. Loan growth continued to be muted, growing by only 3.4 per cent YoY. The net profit of PNB grew by 79.3 per cent QoQ to Rs 550 crore in Q2FY17, primarily due to relatively higher other income of Rs 2,390 crore (76 per cent YoY and 1.4 per cent QoQ) and lower provisioning expenses (decline of 7.5 per cent QoQ). Other income growth was led by one-time higher treasury profit of Rs 650 crore compared with Rs 600 crore in Q1FY17 and Rs 210 crore in Q2FY16.

“Q2FY17 performance signals some improvement in asset quality. But returning to an overall satisfactory asset quality and loan book growth is a long journey. Normalisation of RoA/RoE is significantly out in the future. On estimates changes and one quarter rollover, our price target increases to Rs 130, maintain ‘hold’,” said Jefferies India.

Speaking at the earnings call, ICICI Bank MD & CEO Chanda Kochhar expressed hope that the asset quality pain will decrease. “Addition to NPAs during Q2 was Rs 8,000 crore and if you look at the non-retail portfolio, 80 per cent of this is from the restructured portfolio,” said Kochhar.

ICICI Bank made additional provisions of Rs 3,588 crore during the quarter, which included Rs 1,678 crore for standard loans, entire Rs 395 crore loss on sale of NPA during H1, recognised upfront, and floating provision of Rs 1,515 crore. Other provisions were Rs 3,495 crore in Q2 against Rs 2,515 crore in Q1 and Rs 942 crore in Q2FY16. The gross non-performing loans were Rs 32,178.60 crore (6.82 per cent) up from Rs 15,857 crore (3.77 per cent) in Q2FY16. Gross NPAs were Rs 27,193.58 crore (5.87 per cent) in Q1FY16.

Bank of India’s Q2 net profit at Rs 130 crore beat analyst estimates due to higher non-interest income. Slippages declined to Rs 4,000 crore against Rs 6,200 crore in Q1. The management expects GNPAs to remain stable, as recoveries are likely to compensate for slippages. “We have a ‘sell’ rating and September 2017 target price is Rs 80 (Rs 75 earlier),” said Jariwala.

Axis Bank, the third largest private sector lender, reported 83.4 per cent decline in net profit due to a spike in bad loans for Q2 to Rs 319 crore because of a large amount of slippages from the watch list. It had reported a net profit of Rs 1,915.60 crore for Q2FY16. Almost 30 per cent of the Rs 25,200 crore of watch list declared a few quarter ago turned bad in Q2. The Axis Bank management has now suggested for materially higher slippages from the watch list against 60 per cent guided earlier. As on September 30, loans outstanding on Axis Bank’s watch list reduced 32 per cent over the previous quarter and stood at Rs 13,789 crore. The reduction in the watch list primarily represents slippages to NPAs amounting to Rs 7,288 crore, which comprises 89 per cent of the total corporate credit slippages. The watch list has reduced to 3.5 per cent of customer assets in Q2, from 5.4 per cent in Q1 and 6.2 per cent in Q4FY16.

Jairam Sridharan, chief financial officer of Axis Bank, said in a conference call, “We believe a higher portion of the watch list (Rs 22,000 crore) could become NPAs over the next few quarters.” Aalok Shah and Gaurav Jani, analysts at Centrum Broking, said, “We retain ‘hold’ on Axis Bank with target price unchanged at Rs 500.”

HDFC Bank delivered another strong quarter with earnings growth of 20 per cent YoY, driven by strong retail loan growth (over 22 per cent YoY) pushing total loan growth of 18 per cent, and healthy non-interest income growth of 14 per cent YoY driven by sustained fee income growth (over 13 per cent YoY) and trading gains (over 75 per cent YoY). “Despite rising competition in the retail banking space, HDFC Bank’s retail loans continue to grow across product lines and retail loans now form 64 per cent of total book against 62 per cent in Q2FY16. HDFC Bank has continued to grow on a larger base and we expect the trends to continue,” said Puneet Gulati of JM Financial.

Kotak Bank reported a 43 per cent rise in net profit to Rs 813 crore for Q2, driven by strong net interest income, other income and operating profit. Similarly, Federal Bank reported a 25 per cent rise in net profit to Rs 201 crore.

Yes Bank too remained a consistent performer by reporting a net profit of Rs 801.5 crore in Q2, which was YoY growth of 31.3 per cent. Net interest income (NII) grew 30.5 per cent YoY on the back of 38 per cent growth in advances. Net interest margin (NIM) remained healthy at 3.4 per cent and net profit grew by 31.3 per cent. Asset quality despite increasing industry-wide stress, remained stable and healthy at 0.83 per cent GNPA. Of the other private sector bank, IndusInd Bank’s net profit rose 25.8 per cent to Rs 704.3 crore in Q2 from Rs 560 crore in Q1FY16.


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