Provisioning key theme of bank results in 4th quarter

Provisioning was the overriding theme for the banking sector in Q4FY19. Indian banks saw another quarter of surging provisions that hit their profitability, however, slippages remained under control. While top public sector banks reported lower profit, the smaller and medium-sized ones managed to narrow their losses. In contrast, private banks delivered on their guidance and continued to better their performance.

The credit cost for the banking sector, which was 4.8 per cent in Q4FY18, has reduced to 2.75 per cent to 3 per cent in Q4FY19, going by the bank results declared so far.

The pace of corporate slippages has come down significantly in Q4FY19. During Q4FY18, banks had reported a steep rise in slippages due to the February 12 circular of the RBI. According to analysts, since banks have provided almost 60-70 per cent on the existing stressed assets, the incremental credit cost would be significantly lower in FY20.

However, default risk from existing stressed NBFCs and housing finance companies (such as Indiabulls, DHFL, Reliance Home Finance and Reliance Commercial Finance) could add to the credit cost of banks in FY20. While there is some stress building up in the SME sector, the RBI’s forbearance, which is available to banks from January 1, 2019 to March 31, 2020, should take care of the SME stress. However, if the economy does not recover then stress would be seen in FY21.

Says Jindal Haria, Associate Director, India Ratings, “Next year, the credit cost for banks is likely to reduce further to 2 per cent to 2.5 per cent.”

“Private banks have fared far better than their public sector peers as they do not have capital constraints, their provision coverage ratio (PCR) is also high and their origination machinery is working well. Most of the private banks so far have delivered on their guidance and should be continuing the good performance,” added Haria.

Siddharth Purohit, Research Analyst at SMC Institutional Equities, said, “While slippage for most of the banks during the quarter has been under control, ageing related provisions and write offs have kept the overall credit cost high. But it is also good to see that the overall provision coverage ratio of most banks has improved. This should help in lower provisions, going ahead. Overall, the quarter seems satifactory for the sector.”

State Bank of India reported lower net profit in Q4 at Rs 838.40 crore due to a steep rise in provisioning. Its gross non-performing loans (GNPLs) and net NPLs declined 118 basis points / 94bps quarter-on-quarter (QoQ) to 7.5 per cent / 3 per cent respectively, while PCR improved 500 bps sequentially to 62 per cent.

Private lender ICICI Bank reported muted earnings growth, a drop of 5 per cent in net profit year-on-year (YoY) to Rs 969 crore on the back of higher than expected credit costs (28 per cent QoQ) which offset strong net interest income rise of 27 per cent YoY and fee (15 per cent YoY growth and loans (15 per cent YoY).

A clutch of state owned banks that reported their earnings this week posted losses on higher provisioning.