Public sector banks see operating profit decline in Q3FY22

The October-December quarter of FY22 may have been a strong one for the banking sector, but public sector banks (PSBs) may still have some distance to go in terms of operational improvement. Data sourced from Capitaline showed that the 12 PSBs’ aggregate operating profit fell 0.6% on a year-on-year (y-o-y) basis to Rs 49,596.41 crore, even as private banks as a group saw an improvement in the metric.

Five of the 12 PSBs saw their operating profits decline. Most of them attributed the downtrend to poor performance on the treasury front which, in turn, is a function of interest rate movements in the money markets. Q3FY22 saw yields shooting up across debt instruments which resulted in banks booking mark-to-market (MTM) losses on their investment portfolios.

While some lenders were able to offset the impact of MTM losses through a growth in net interest incomes (NIIs), others such as Punjab National Bank (PNB) and Bank of India (BoI) performed poorly on that parameter as well.

The management at PNB attributed the bank’s poor operational performance to the impact of a standstill on bad-loan recognition in the year-ago period, which resulted in interest reversals during subsequent quarters. PNB’s operating profit fell over 17% y-o-y to Rs 5,076.31 crore in Q3FY22.

BoI MD & CEO A K Das said that the 21% fall in operating profit at the bank was due to various factors, including lower treasury income due to the firming up of G-sec yields. “There has been a fall in interest income and NII. However, the fall appears magnified also on account of inclusion of one-off items during the previous periods,” Das said.

Union Bank of India saw its operating profit fall 3% y-o-y to Rs 5,098.19 crore. Its management also attributed the drop to losses in the treasury segment. Rajkiran Rai G, MD & CEO, Union Bank, said, “Treasury income is bound to go down because in the whole ecosystem, the interest rate is going up. So, we had that impact and because of that the operating profit has come down a bit.”

Rai added that treasury income will remain under pressure for some time, but improved NIIs will make up for those losses. “Whatever we lose in treasury, we will definitely make up in the interest income because the interest rate is moving up,” Rai said. He expects to make better use of money parked in T-bills and other investments by deploying them as loans.

Other bankers are also of the view that as yields rise, the contribution of treasury income and NII to the total income will get reversed. However, PSBs are not positioned as advantageously as their private-sector peers to gain from a sector-wide improvement in credit offtake.

In a recent report, Saswata Guha, senior director – banks at Fitch Ratings, pointed out that private banks reported an average loan growth of 10.8% as of H1FY22, much higher than 3.5% for PSBs, and are set to benefit from this momentum. “The absence of meaningful competition from state banks – state banks’ average loan growth was 3.5% in H1FY22 – means private banks will make disproportionate market-share gains as the economic recovery takes hold. We calculate that state banks would need $12 billion in additional CET1 to sustain compounded annual loan growth of 10% until FY25,” Guha wrote in the report.

from Banking & Finance – The Financial Express https://ift.tt/hX3O8vK