Five of the seven government-owned banks that announced their earnings last Friday reported losses in the June quarter, while profits of the other two dropped between 32% and 61%. Yet, their stocks rose—one of them by as much as 10.3% and the other over 7%. Investors rushed to buy them as they felt most of them were through with their clean-up exercise; from now on, things could only get better.
Fifteen of the 24 listed state-run banks now have at least 10% or more gross bad assets. Indian Overseas Bank (IOB) tops the list with more than one-fifth of its loans turning bad; Uco Bank stands second (17.19% gross non-performing assets or NPAs) and, another Kolkata-based bank, United Bank of India (UBI), third (14.29%). The lowest in the ladder, the bank with the best asset quality, is a State Bank of India (SBI) associate bank, State Bank of Bikaner and Jaipur (6.2%), followed by SBI (6.94%).
In the past one year, since the Reserve Bank of India embarked on an asset quality review asking them to clean up their balance sheets by March 2017, many state-owned banks have more than doubled their NPAs. Among private banks, Jammu & Kashmir Bank Ltd has the highest gross NPAs (9.31%), followed by Dhanlaxmi Bank Ltd (7.02%). For ICICI Bank Ltd, India’s largest bank outside state control, gross bad loans amounted to 5.87% of its loan portfolio.
After setting aside money or making provisions, net NPAs of 20 state-run banks now have at least 5% and up to 13.97% of their loan portfolios. Here too, IOB is at the top, followed by Uco Bank (10.04%) and UBI (9.85%). State Bank of Bikaner and Jaipur and SBI are at the bottom with the least net NPAs. Incidentally, Indian Bank—which had its entire net worth wiped out by bad loans in the mid-1990s—is now the third best state-run bank, in terms of quality of assets. Among private banks, Jammu & Kashmir Bank tops the list (6.19%) and ICICI Bank comes second with 3.35% net NPAs.
While it is worrisome that the gross NPAs of all listed banks continued to rise in the June quarter and for some of them (State Bank of Travancore, IOB, Bank of Maharashtra, Allahabad Bank) the rise has been quite steep, the good news is that the pace of rise for many banks (including SBI, Bank of India, Canara Bank and Indian Bank) has slowed. This is providing comfort to investors. Bank of India has, in fact, managed to bring down its net NPAs by just a basis point, or one-hundredth of a percentage point, even as Yes Bank Ltd and South Indian Bank Ltd were able to keep their net NPA levels unchanged.
Data compiled by Mint Research’s Ashwin Ramarathinam shows that in absolute term, the gross NPAs of 39 listed banks (IDFC Bank Ltd is not included in the list as it started operations in October 2015 and hence the comparable figures for last June are not available) have jumped 96%—from Rs.3.2 trillion to Rs.6.3 trillion in the past one year. For 11 state-owned banks and three private ones, the rise has been more than 100% and up to 149%.
SBI’s gross bad loans in June crossed Rs.1 trillion, followed by Punjab National Bank (Rs.56,654 crore), Bank of India (Rs.51,874 crore), Bank of Baroda (Rs.42,992 crore), IOB (Rs.33,913 crore), Canara Bank (Rs.32,334 crore), Union Bank (Rs.27,280 crore), IDBI Bank Ltd (Rs.27,275 crore) and ICICI Bank (Rs.27,193 crore). Both IOB and IDBI Bank have smaller loan portfolios than their peers in the group which have such high levels of gross bad loans.
After provision, the net NPAs of this pack of listed entities have more than doubled in one year—from Rs.1.78 trillion to Rs.3.7 trillion. However, the growth in the June quarter, for both gross and net bad loans, in absolute term, has been in single digits, 8.86% and 9.33%, respectively. The stock market is cheering this.
Naturally, the amount of provision done by these banks in June is around 45% less than what they had done in March, even though it has risen 89% compared with June 2015. Despite this, 10 state-owned banks announced net losses and another nine a sharp drop in net profits. Overall, the pack of 39 listed banks’ net profit stood at Rs.9,062 crore in June, sharply down from Rs.19,319 crore in the year-ago quarter, but much better than the March quarter when they collectively posted Rs.14,458 crore in losses. Of course, most private banks are better off than their peers in the public sector.
For sure, Indian banks seem to be getting a grip on their bad loans, but one area of concern is tardy growth in their operating profits—less than 10% year-on-year and little changed compared with the March quarter. This is despite the rise in their treasury income, riding the rally in bond prices and fall in yields. They will continue to make money in bond trading as the yield on 10-year benchmark bonds last week dropped to 7.08%, the lowest since September 2009, and bond dealers are predicting 10-year yields going below 7% in the next few months.
However, there is hardly any improvement in their interest income, the mainstay of the banking business. For the entire pack of listed banks, the rise in net interest income in June has been just about 3%, and compared with March, it is virtually unchanged. Most of the state-run banks are showing a drop in net interest income for two reasons—a drop in interest rates on loans as well as their inability or refusal to grow the loan book for fear of piling more bad assets. The biggest task at hand is to make these banks lend fresh money. Unless they start lending, they will not earn enough to make profits and strengthen their net worth even as a bonds rally helps them provide for bad loans. Quite a few banks have their gross bad loans exceeding net worth. No one wants to see zombie banks in India.
