Banks see healthy Q4 but bad loans may throw a spanner

Indian banks have managed to perform reasonably well in the fourth quarter despite worries about rising bad loans and shortage of liquidity.

They have steered their asset liability management well despite upward pressure on deposit cost but the amount of restructured loans can throw a spanner for many quarters especially for the government banks if suspended projects do not take off soon.

"Up to the operating profit level, we are the most efficient among all banks including private sector ones. But we lose out after the operating profit when the loan loss provision comes," State Bank of India chairman Pratip Chaudhuri said.

While the state of stressed assets for the banking sector has shown a little improvement since December 2011, March 2012 numbers indicate bad loans or gross non performing assets rose 46% compared to the corresponding period last year.

Data show that asset quality, as measured by the change in the percentage of gross non performing assets to gross advances, has deteriorated for a majority of the government banks, which have significant exposure to the troubled public-sector power distribution companies and to the aviation sector.

"We need to follow a cautious approach. Banks are very much concerned about the asset quality amid slowing growth," Union Bank of India chairman and managing director Debabrata Sarkar said.

Central Bank of India reported a 301 basis points rise in gross non-performing assets, the highest in the industry. The bank also reported the biggest decline in profit during the fourth quarter from Rs 1252.41 crore last year to Rs 533.04 crore in March 2012, a fall of 57%.

For SBI, the country's largest lender, the percentage of gross non-performing assets to gross advances increased by 116 basis points to 4.44%. Other banks that reported a significantly high increase in bad loans include Oriental Bank of Commerce, State Bank of Mysore and Punjab National Bank.

With industrial production growth slowing, banks have focused on growing retail lending that gives a better return.

SBI led the way with its "dream NIM" of 3.85%, which many think will be difficult to sustain as banks, in general, face stiff challenges in mobilising low-cost deposits when inflation remains high.

The likes of Allahabad Bank, Bank of Maharashtra, Uco Bank and private lenders such as ING Vysya Bank, ICICI Bank and South Indian Bank too have managed to improve their net interest margins (NIM), the difference between yield on advances and cost of deposits, after banks could deploy the resources with better yields after Reserve Bank of India reduced the cash reserve requirement by 125 bps in the fourth quarter.

SBI's Chaudhuri said retail deposit growth will be the biggest challenge in next few quarters. Union Bank's Sarkar could not agree more. "Mobilising low-cost resources and maintain NIM pose a challenge because of high inflation."

In terms of rise in annual profit, Development Credit Bank and State Bank of India reported the highest growth of 157% and 42% respectively. The largest rise in total income was from Yes Bank, at 54%, followed by IndusInd Bank at 48%, Indian Overseas Bank at 47%, South Indian Bank at 45% and Kotak Mahindra Bank at 44%.

Source: EconomicTimes