CNBC-TV18 had mentioned in Q1FY19 result analysis that the worst is over for the Indian banking sector in terms of pain in earnings and slippages in Q4FY18. The second quarter net loss of Rs 3,731 crore for the banking sector is the lowest in the last four quarters. The losses are down for more than 90 percent from the Q4FY18 numbers. The public sector undertaking (PSU) banks reported a decline of 77 percent in net loss, while 45 percent growth in profit of private banks from Q4FY18 to Q2FY19.

If Punjab National Bank (PNB) didn’t register net loss of Rs 4,532 crore, banking sector would have reported first time net profit of Rs 802 crore in the last four quarters. The second quarter saw two new records on the negative side by IDBI Bank: The CET1 (common equity tier-1) ratio was below four percent for the first time in 15-18 years, while the GNPA (gross non-performing assets) ratio at around 32 percent is the highest for any commercial bank in their operating history.

Slippages

Slippages are loans that turn into non-performing assets (NPAs) as payments are due for more than 90 days. The slippages lead a bank to lower interest income, while higher provisioning dent the earning capacity. Its vice-versa impact i.e. declining trend of slippages coupled with loan growth means better earning capacity of the bank. On the positive side, slippages have declined massively for the banking sector and the worst was seen in Q4FY18 on account of Reserve Bank of India’s (RBI) circular on restructured loans. The declining trend of slippages mean less losses for the banking sector.

The slippages have declined by 72 percent from Q4FY18 to Q2FY19 for top commercial banks. From Q4FY18 to Q2FY19, the PSU banks slippages have declined by 73 percent, while private banks slippages have declined by 68 percent. Further, share of PSU banks in slippages have declined from 75 percent in Q4FY18 to 71 percent in Q2FY19. For private banks, it have increased from 25 percent in Q4FY18 to 29 percent in Q2FY19.

Losses for the banking sector declined massively by 43 percent quarter-on-quarter (QoQ) to Rs 3,731 crore against Rs 6,498 crore QoQ. Losses of PSU banks declined by 11.5 percent QoQ, while private banks reported profit growth of 8.5 percent QoQ.

The overall banking sector saw decline in gross NPA by 0.4 percent QoQ in absolute value, while gross NPA ratio declined by 40 bps (One basis point is a hundredth of a percentage point) QoQ. Gross NPA of PSU banks declined by 0.6 percent QoQ in absolute value, while gross NPA ratio improved by 37 bps. However in absolute value, gross NPA of private banks increased by 0.7 percent QoQ, but due to a healthy loan growth of around 5.5 percent QoQ saw a decline in gross NPA ratio by 22 bps QoQ. The GNPA in absolute value was at Rs 10 lakh crore, down 2.2 percent QoQ, while as a ratio, GNPA of banking sector declined by 38 bps QoQ to 11.45 percent.

Banks (Rs cr) Q2FY19 Q2FY18 Q1FY19 YOY QOQ PAT (3,731) 6,761 (6,498) NA (88.2) GNPA 999,509 841,488 1,003,868 20.9 (2.2) NNPA 464,347 453,114 485,737 3.9 (6.3) Loan Book 8,727,041 7,964,796 8,470,256 7.2 0.9 GNPA (%) 11.45 10.57 11.85 134 (38) NNPA (%) 5.32 5.69 5.73 (18) (44)

PSU banks have reported a net loss of Rs 14,716 crore against Rs 16,622 crore, down 11.5 percent QoQ. The state-run banks have reported net loss for eight quarters out of the last 11 quarters totaling to Rs 133,838 crore, on the back of lower sequential slippages.

However, loan growth remains muted for PSU banks and continue to lose their market share to private banks. PSU banks have lost market share of 786 bps or 7.86 percent in last 12 quarters. PSU banks market share now stands at 66.7 percent in Q1FY19 against 74.6 percent in Q3FY16.

The GNPA in absolute value for PSU banks has decreased to Rs 8.69 lakh crore in Q2FY19 against Rs 8.74 lakh crore in Q1FY19. State-run bank have been more prudent in improving their provision coverage ratio. The core provision coverage ratio (i.e. provision coverage ratio without technical write off) has improved for PSU banks from 41.3 percent in Q3FY16 to 53 percent in Q1FY19, up 1,168 bps. Despite having the extra burden of treasury losses and elevated provisions, the net loss for PSU banks declined by 11.5 percent QoQ.

PSU bankers have said they expect further recovery from National Company Law Tribunal (NCLT) list accounts in Q3FY19 (with the likes of Essar Steel, Uttam Galva etc). The profitability of PSU banks was also hit on account of higher provisions for gratuity and pension due to rise in bond yields, which impacted their calculations.

One of the best things to happen in second quarters despite all the bad results, residual stress in the balance sheet is down to single digits (as % of the loan book). This is perhaps the lowest ever residual stress in the balance sheet of PSU banks over the last 3-5 years.

PSU Banks (Rs cr) Q2FY19 Q2FY18 Q1FY19 YOY QOQ PAT (14,716) (4,269) (16,622) 244.7 (11.5) GNPA 868,812 733,974 874,071 18.4 (0.6) NNPA 408,500 397,588 426,629 2.7 (4.2) GNPA (%) 14.93 13.16 15.29 177 (37) NNPA (%) 7.02 7.13 7.46 (11) (45)

Surprisingly, the share of prompt corrective action (PCA) framework of 11 PSU banks in GNPA has increased QoQ due to IDBI Bank and Allahabad Bank. Gross NPA of government banks under PCA has increased to Rs 3.49 lakh crore against Rs 3.47 lakh crore, up 0.7 percent QoQ. The share in GNPA increased to 35 percent from 34.6 percent QoQ. Loan growth continued to decline for PSU banks under PCA. Loan book was at Rs 15.25 lakh crore, down 3.4 percent QoQ. Due to shrinkage in their balance sheet, their credit book market share has declined to 16.9 percent against 18 percent QoQ.

Capital to Risk weighted Asset Ratio (CRAR)

Net Non-Performing Assets (NPA)

Return on Assets (RoA)

Leverage

Under PAC by RBI

Banks cannot grow aggressively as they need to improve their asset quality. Once PCA is triggered, the bank faces restrictions on expenses such as opening branches, recruiting staff and giving increments to employees. Bank can disburse loans only to those companies whose borrowing is above investment grades. Banks will also not be able to pick up capital from the market, but mostly from government and PSU agencies like LIC.

The net profit of of private banks was at Rs 10,985 crore, down 0.4 percent YoY, but up 8.5 percent QoQ. The quarterly profits of the private banks is on the higher side in last three quarters. The worrying factor amongst private banks was they saw an increase in the absolute value of gross NPA QoQ.

Gross NPA was at Rs 1.31 lakh crore, up 0.7 percent QoQ, instead of seeing a decline as expected on account of better recovery. The good part is private banks continued to gain market share on the back of strong loan growth, which enabled them to make higher provisions and thereby improving their net NPA.

Loan growth was at 5.5 percent QoQ, which led to better income for private banks. Net NPA of private banks was at Rs 55,847 crore, down 5.5 percent QoQ. Some of the positive surprises in private bank results came from ICICI Bank, Axis Bank, HDFC Bank, Ujjivan Small Finance Bank and negative surprises came from Yes Bank, IDFC Bank and Bandhan Bank.

Pvt Banks (Rs cr) Q2FY19 Q2FY18 Q1FY19 YOY QOQ PAT 10,985 11,030 10,124 (0.4) 8.5 GNPA 130,696 107,514 129,796 21.6 0.7 NNPA 55,847 55,527 59,107 0.6 (5.5) GNPA (%) 4.50 4.51 4.71 (1) (22) NNPA (%) 1.92 2.33 2.15 (41) (22)

Overall, the top banks in PSU and private domain saw slippages declined by 30.6 percent QoQ to Rs 38,680 crore against Rs 55,711 crore. Slippages declined by 36.7 percent QoQ for PSU banks to Rs 26,553 crore against Rs 41,973 crore, while it declined by 11.7 percent QoQ for private banks to Rs 12,127 crore against Rs 13,738 crore QoQ. Slippages have increased for HDFC Bank and Yes Bank QoQ, while for everyone else, it declined sequentially.

The highest increase in slippages were seen from Yes Bank and Kotak Mahindra Bank. Highest decline in slippages were seen from Union Bank of India, Axis Bank, State Bank of India (SBI), PNB and ICICI Bank. In absolute value, highest increase in slippages have been from Yes Bank and Kotak Mahindra Bank, while substantial decline in absolute value of slippages was seen for SBI, Bank of India and Union Bank of India.