Tag: asset quality

Asset quality pains for banks ease, focus on growth likely in H2

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Asset quality pains for banks have largely eased after the second quarter and they are now likely to focus on growth, believe analysts.

A report by ICICI Securities noted that overall the quarter ended September 30, 2021 saw improvement in broad business parameters and management commentaries have been positive suggesting better traction in the second half of the fiscal.

“We believe profitability should see a boost in coming quarters with better top-line growth and lower provisions. Loan growth is to be largely driven by retail and MSME segment while corporate segment should witness gradual pick up in working capital utilisation,” it said.

Also read: NPAs of NBFCs, HFCs may rise for 3-4 quarters due to tweak in norms

Asset quality performance was better than previous quarter with less slippages and better recoveries, the report said.

Slippages were mostly at about 1- 1.4 per cent compared to 2-2.5 per cent quarter-on-quarter while gross non performing assets declined by 30 to 70 basis points, except for a few banks.

With the opening up of the economy and normalisation of business activities, most banks have reported better collection efficiencies as well as higher credit demand.

“The asset quality pain for most banks is largely behind and the focus now is on the growth acceleration. The one-off gains helped public sector banks to maintain a strong profitability; whereas the private banks’ performance was a shade better than the first quarter,” said a report by Emkay Global Financial Services.

The second quarter of the fiscal was marked by sequential moderation in stress formation, mainly led by retail, and more so for large private and public sector banks, the report said, adding that it expects non performing asset ratios to moderate due to lower slippages and higher recovery and write offs as most banks, barring a few small private banks, sit on a comfortable provision cover.

Motilal Oswal in a report also said that the asset quality outlook for public sector banks is improving gradually after a prolonged corporate NPL cycle – GNPA ratios had reached the peak of about 15 per cent in 2017-18.

A recent report by CARE Ratings had also noted that the NPA situation of the Indian banking system as represented by 23 banks – 9 PSBs and 14 private sector lenders, indicates a gradual improvement in the NPA ratio in September 2021.

The NPA ratio for these 23 banks was 6.97 per cent as on September 30, 2021 compared to 7.36 per cent as on September 30, 2020.

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Indian Bank more than doubles net profit in Q2

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Public sector lender Indian Bank reported a notable performance across parameters — double-digit growth in operating profit, more than two-fold increase net profit, reduction in net NPA, growth in CASA (current account savings account) and rise in businesses of RAM (retail, agriculture and MSME) sector – for the quarter ended September 30.

The Chennai-headquartered bank, which is now an amalgamated entity of Indian Bank and Allahabad Bank, reported net profit of ₹1,089 crore for the second quarter of this fiscal compared to ₹412 crore in Q2 of the last fiscal, helped by higher operating profit, growth in non-interest income and lower provisions.

Across parameters

Operating profit of the company grew 11 per cent to ₹3,276 crore (₹2,942 crore), on the back of 26 per cent rise in non-interest income at ₹1,966 crore (₹1,558 crore), aided by higher recovery of bad debts and forex income. Its net interest income (NII) fell marginally to ₹4,084 crore (against ₹4,144 crore).

Also see: ‘RBI should allow the rupee to appreciate’

“The bank’s net and operating profits have increased, asset quality is under control, growth is happening in RAM sectors, CASA continues to increase and improvements across functions such as digital banking,” said Shanti Lal Jain, Managing Director & CEO of Indian Bank.

Strong recovery

Total provisions were lower by 14 per cent at ₹2,187 crore (₹2,530 crore in Q2FY21). Loan loss provisions were at ₹2,216 crore (₹1,880 crore).

Fresh slippages were higher at ₹3,952 crore (₹249 crore), mainly due to an NBFC account that accounted for ₹1,821 crore.

“Barring this, slippages of about ₹2,000 crore is just 0.5 per cent of the book. But, higher recovery helped us to maintain the asset quality,” Jain said.

Cash recovery was higher at ₹831 (₹795 crore) and total recovery stood at ₹3,426 crore against ₹1,168 crore. Domestic advances grew 5 per cent to ₹374,508 crore (₹356,627 crore). Retail, Agriculture and MSME loans grew by 14 per cent (₹73,376 crore), 16 per cent (₹82,857 crore) and 8 per cent (₹70,268 crore). The three segments accounted for 60 per cent of advances.

Also see: Mobile payments growing faster than card payments

Total deposits grew 10 per cent to ₹551,472 crore (₹501,956 crore). CASA was maintained at 41 per cent.

Lower NPAs

Gross NPAs was at 9.56 per cent compared to 9.89 per cent in the year-ago quarter and 9.69 per cent in the previous quarter. Net NPA was higher at 3.26 per cent when compared with 2.96 per cent a year ago, but down from 3.47 per cent in the preceding quarter.

“Our SMA1 and SMA2 are decreasing and collection efficiencies are improving. With this trend, we don’t have worries on the asset quality side. Our NII has grown sequentially and we have brought the cost of deposits to below 4 per cent. Therefore, when the economy gradually hits the growth path, our credit growth will also happen. As a result, our interest income will increase,” said Jain.

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Federal Bank Q2 net profit up 49.6%

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Federal Bank reported a 49.6 per cent jump in its standalone net profit at ₹460.26 crore in the second quarter of the fiscal from ₹307.62 crore in the corresponding period a year ago.

This was aided by higher net interest income and lower provisions.

For the quarter-ended September 30, 2021, Federal Bank reported a net interest income growth of 7.2 per cent to ₹1,479.42 crore versus ₹1,379.85 crore a year ago.

Other income marginally fell by 1 per cent on an annual basis to ₹444.46 crore in the second quarter of 2021-22.

Net interest margin stood at 3.2 per cent as on September 30, 2021.

Provisions fell by 53.9 per cent to ₹245.33 crore in the second quarter compared to ₹532.09 crore a year ago.

Asset quality

Gross non-performing assets stood at 3.24 per cent of gross advances as on September 30, 2021 from 2.84 per cent on September 30, 2020. It, however, fell on a sequential basis from 3.5 per cent as on June 30, 2021.

Net NPA stood at 1.12 per cent of net advances at the end of the second quarter from 0.99 per cent a year ago and 1.23 per cent as on June 30, 2021.

Provision Coverage Ratio (including technical write-offs) stood at 79.33 per cent.

“We witnessed strong traction in NIM and pick-up in NII on the back of good credit growth in certain segments. Strong recovery and upgrades helped in virtually no credit cost for the quarter,” said Shyam Srinivasan, Managing Director and CEO, Federal Bank, adding that the digital story of the bank continues to prosper with fintech partnerships progressing well and contributing to over 50 per cent of new accounts booked.

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YES Bank posts 74% jump in Q2 net profit

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Private sector lender YES Bank’s standalone net profit surged by 74.3 per cent to ₹225.5 crore in the second quarter of the fiscal led by a sharp jump in non interest income and lower provisions.

The bank’s standalone net profit was ₹129.37 crore in the second quarter of last fiscal.

For the quarter ended September 30, 2021, YES Bank however, reported a 23.4 per cent drop in its net interest income to ₹1,512 crore as against ₹1,973 crore a year ago.

Net interest margin was at 2.2 per cent.

Non interest income jumped up by 30.2 per cent on a year on year basis to ₹778 crore in the July to September 2021 quarter.

Provisions were 65 per cent lower at ₹377 crore in the second quarter of the fiscal as against ₹1,078 crore a year ago.

Asset quality saw some improvement but non performing assets remained high.

Gross NPAs was ₹28,740.59 crore or 14.97 per cent of gross advances as on September 30, 2021 versus 16.9 per cent a year ago. Net NPAs was 5.55 per cent of net advances at the end of the second quarter as against 4.71 per cent a year ago.

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Moody’s upgrades outlook for Indian banking system

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Moody’s Investors Service has revised the outlook for the Indian banking system to “stable” from “negative” on the back of stabilising asset quality and improved capital drive.

The global credit rating agency, in its Banking system outlook for India, observed that the deterioration of asset quality since the onset of the coronavirus pandemic has been moderate, and an improving operating environment will support asset quality.

Moody’s upgrades India’s rating outlook to ‘Stable’ from ‘Negative’

Declining credit costs as a result of improving asset quality will lead to improvements in profitability. The agency assessed that capital will remain above pre-pandemic levels.

Moody’s expects India’s economy to continue to recover in the next 12-18 months, with GDP growing 9.3 per cent in the fiscal year ending March 2022 and 7.9 per cent in the following year.

The agency opined that the pick-up in economic activity will drive credit growth, which it expects to be 10-13 per cent annually. Weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded.

Asset quality will be stable

According to Moody’s, the deterioration of asset quality since the onset of the pandemic has been more moderate than it expected despite relatively limited regulatory support for borrowers.

The agency noted that the quality of corporate loans has improved, indicating that banks have recognised and provisioned for all legacy problem loans in this segment.

Covid second wave raises asset risks for banks: Moody’s

“The quality of retail loans has deteriorated, but to a limited degree because large-scale job losses have not occurred. We expect asset quality will further improve, leading to decline in credit costs, as economic activity normalises,” Moody’s said.

Raising equity capital

Capital ratios have risen across rated banks in the past year because most have issued new shares, per the agency.

Moody’s said public sector banks’ ability to raise equity capital from the market is particularly credit positive because it reduces their dependence on the government for capital.

However, further increases in capital will be limited because banks will use most of retained earnings to support an acceleration of loan growth, according to the agency.

The agency estimated that banks’ returns on assets will rise as credit costs will decline while banks’ core profitability will be stable.

If interest rates rise, net interest margins will increase, but it will also lead to mark-to-market losses on banks’ large holdings of government securities, it said.

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Ujjivan Small Finance bank to do portfolio quality & process audit, BFSI News, ET BFSI

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About 68 per cent of the Rs 14,000-crore loan portfolio is still in the unsecured microfinance space at Ujjivan, where chief executive Nitin Chugh unexpectedly quit last week, capping off a raft of top-level exits at the lender that went public in 2019.

“We are trying to identify a candidate internally who can manage the day to day operation till Nitin leaves. Carol Furtado is the top candidate,” Ujjivan founder Samit Ghosh told investors on Friday morning.

Ujjivan Small Finance Bank has decided to do an independent portfolio quality & process audit as it is facing stress on asset quality following the disruptions caused by the pandemic.

It will also review its provisioning policy to create an adequate buffer against credit risk.

The holding company of the bank, Ujjivan Financial Services, had earlier expressed concerns over asset classification, bad loan recognition and the ad-hoc bad loan provisioning under chief executive Nitin Chugh, who resigned last week.

The bank on Wednesday appointed Carol Furtado as office on special duty to manage day-to-day operations in the bank till Chugh’s official exit on September 30.

“The bank is undertaking an independent portfolio quality & process audit. We look towards streamlining the provisioning policy. We are confident of strengthening the organisation and emerging as a stronger Ujjivan,” founder of the bank Samit Ghosh said. Ghosh is the common director on the boards of the bank and the holding company.

“With the provision coverage ratio of 75%, the highest in the industry, we are very well positioned,” he added.

After Chugh’s exit, Furtado will be appointed as an interim CEO, subject to regulator’s approval, the company announced Wednesday after its board gave the stamp of approval on the proposal.

The bank also said that it will begin the search for the next full-time CEO and submit two names to the Reserve Bank of India seeking its approval.

In parallel, the bank has also appointed former Andhra Bank chairman BA Prabhakar as its chairman.

ET had highlighted the possibility of both the move immediately after Chugh’s resignation became public.

Furtado, part of the founding team of Ujjivan Financial Services since 2005, will be leading the charge of handling the day-to-day operations from August 26, the company said. Post September 30, she will take charge as the Interim CEO, subject to regulator’s approval.

Ujjivan Financial Services is the holding company for Ujjivan Small Finance Bank, which started its journey in February 2017.

“Carol has been our go to person during any major crisis. I am sure she will lead us out of this Covid crisis with flying colours,” said Ghosh.

Furtado has spearheaded the organisation on numerous occasions, playing critical roles in asset quality management and HR. “Her extensive experience, over a decade and a half, across business, operations, and HR, along with her expertise in leading Ujjivan, through various crises, make her an ideal candidate,” the company said.



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Amid asset quality woes, FPIs pull out nearly ₹11,000 crore from financials in July

Banking & Finance

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Foreign portfolio investors (FPIs) have pulled out close to ₹11,000 crore from the financial services sector stocks in July amid concerns over the spike in fresh slippages and asset quality deterioration from the key sector constituents — banks and NBFCs.

According to NSDL data, FPIs pulled out ₹10,767 crore from the financial services sector in July. Of the same, ₹7,341 crore was pulled out from banks while the remaining ₹3,426 crore outflow was from ‘Other financial services’ which includes NBFCs and financial institutions (FIs). The outflow from the financial sector accounts for 95 per cent of the overall FPI outflow during the month across 35 sectors.

“The banking index has been underperforming on concerns of asset quality deterioration. The 6-month Nifty Bank return is only 0.43 per cent while the 6-month Nifty return is 8.8 per cent This under-performance has been largely due to the poor performance of HDFC Bank and Kotak Bank. These two were FIIs’ favourites,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Almost all private and public sector banks have posted good results in the first quarter in terms of earnings, profitability and business growth. However, fresh slippages and elevated levels of non-performing assets still remain a concern for the investors. Take State Bank of India for instance. The country’s largest lender posted its highest ever quarterly net profit at ₹6,504 crore in Q1FY22. However, fresh slippages during the quarter went up to ₹15,666 crore (from ₹3,637 crore in the year-ago quarter). Although, the bank said it was able to claw back Q1 slippages to the tune of ₹4,700 crore in July.

Covid impact

Similarly, major private sector banks including HDFC Bank, ICICI Bank, Axis Bank have all witnessed deterioration in their asset quality in the first quarter due to the impact of the second wave of pandemic.

In its recent report on largest private sector lender HDFC Bank, Emkay Global said, “The bank has managed the first Covid wave well, but the GNPA ratio shot up to a decadal-high of 1.5 per cent in Q1, reflecting accumulated Covid-induced stress in the retail portfolio and the impact of the health scare on collection teams’ mobility.”

The RBI also, in its Financial Stability Report (FSR), said macro stress tests indicate that the gross non-performing asset (GNPA) ratio of scheduled commercial banks may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario; and to 11.22 per cent under a severe stress scenario.

Portfolio rejig

Market experts also attribute the FPI outflow from the financial services stocks to the sector’s underperformance and portfolio rejig efforts by the foreign investors.

Motilal Oswal Financial Services’ recent analysis on institutional ownership in Nifty-500 and Nifty-50 companies highlighted that in the Nifty-500 universe, FIIs have the highest ownership in private banks (48 per cent) followed by NBFCs (31.5 per cent), Oil & Gas (22.5 per cent), Insurance (21.6 per cent) among others.

“Financials has had a dominant run over the past few years. However, BFSI’s (private banks, NBFCs, insurance, and PSU banks) underperformance has continued to reflect in the FII allocation – down to 38 per cent in the Nifty-500 as of June, from 45.1 per cent in December 2019 and 40 per cent in March 2020. This has resulted in the trimming of weight by 130 bps q-o-q (quarter-on-quarter),” it added.

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IOB’s profitable march: Asset quality improves further in Q1

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Indian Overseas Bank (IOB) continued its profitable growth journey as the Chennai-headquartered public sector bank reported a net profit of ₹327 crore for the quarter ended June 30, 2021 compared to a net profit of ₹121 crore in the year-ago quarter, helped by higher operating profit and lower provisions. The bank’s operating profit grew to ₹1,202 crore in June 2021 quarter as against ₹1,094 crore in the corresponding period last year, on account of reduction in interest expenditure and higher non-interest income.

Drop in income

Total income stood at ₹5,155 crore as compared to ₹5,234 crore. Interest income fell to ₹4,063 crore (₹4302 crore in Q1 of last fiscal), while non-interest income was higher at ₹1,092 crore (₹932 crore).

Provisions and contingencies were lower at ₹868 crore (₹970 crore). Slippages stood at ₹1,159 crore during Q1 of this fiscal.

“Some slippages are sudden due to the impact of second wave as cash flow was affected. However, cash recoveries are also higher. We recovered ₹1,125 crore in Q1. With better recoveries and provisioning coverage ratio, we don’t expect any impact on profitability if there are some unexpected slippages in the coming quarters,” said Partha Pratim Sengupta, MD & CEO of the bank.

Gross NPA declined to ₹15,952 crore as of June 2021 quarter when compared with ₹18,291 crore in June 2020 quarter and ₹16,323 crore in March 2021 quarter. Gross NPA ratio fell to 11.48 per cent from 13.90 per cent in the year-ago quarter and 11.69 in the year-ago quarter. Net NPA ratio stood at 3.15 per cent, down from 5.10 per cent in Q1 of last fiscal and 3.58 per cent in Q4 of FY20.

Also read: The turnaround story of Indian Overseas Bank

Its provision coverage ratio improved to 91.56 per cent from 87.97 per cent in the June 2020 quarter and 90.34 per cent in March 2021 quarter. IOB hopes to recover about ₹4,500 crore during this fiscal and of which it has already recovered ₹1,100 crore in the first quarter. “The bank’s request to move out PCA (Prompt Corrective Action) framework is under consideration by RBI and we have answered all queries relating to this. RBI will be looking at other aspects to take a call,” added Sengupta.

Deposits increased to ₹2,42,941 crore in Q1 of this fiscal when compared to ₹2,25,546 crore in year-ago quarter, while gross advances stood at ₹1,38,944 crore as compared to ₹1,31,565 crore. IOB will also be focusing on growth in advances this fiscal. It will focus on lending to select corporates in addition to traditional segments. “Our capital position is also comfortable as of now,” he added.

The bank has restructured ₹4,400 crore worth of accounts and expects another ₹3,000 crore worth of restructuring in the coming quarters.

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Private banks hold on in second Covid wave in Q1, but retail stress grows, BFSI News, ET BFSI

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Private banks have posted first-quarter results that are in line with analyst expectations, less deterioration in asset quality, though they are seeing stress in retail and gold loans.

Axis Bank

Axis Bank’s net profit almost doubled to Rs 21.6b in 1QFY22, with a PPOP of Rs 6420 crore, up 10% YoY. Net interest income grew 11% YoY, while margin fell 10bp QoQ to 3.46% due to interest reversals on slippages, higher liquidity, and change in product mix.

The bank has delivered an in-line performance, even as slippages stood elevated, resulting in a slight deterioration in asset quality. On the business front, loan growth remains flat due to a muted business environment, while margin witnessed a sequential decline. On asset quality, total restructuring stood controlled at 0.44% of loans (including approved, but not implemented). Though slippages could remain elevated in the near term, healthy provision coverage ratio of 70%, coupled with additional provisions buffer of 2%, would likely protect the Balance Sheet against any potential stress.

Kotak Mahindra Bank

Kotak Mahindra Bank reported an in-line core operating performance in a challenging environment, despite muted loan growth across most segments.

Private banks hold on in second Covid wave in Q1, but retail stress grows

Asset quality deteriorated slightly led by the secured Retail segment. Standalone PAT grew 32% but consolidated PAT declined by 3% YoY on account of weaker performance from subsidiaries, mainly Kotak Life and Kotak Prime.

Loan book fell 3% QoQ (up 6.6% YoY) to Rs 2.2 lakh crore, led by a decline across most segments. On the liability front, CASA growth remains steady, driving CASA mix to 60.2% (highest in the industry).

On the asset quality front, slippages stood elevated at Rs 1500 crore (annualized 2.8% of loans) mainly from Tractors, CV/CE, and the Small Commercial segment. GNPA/NNPA ratio rose by 31bp/7bp QoQ to 3.56%/1.28%. The bank carries COVID-related provisions of Rs 1280 crore (0.6% of advances), which remains unchanged.

The bank continues to report steady progress in building a strong liability franchise, with a CASA ratio of an estimated 60% (highest in the industry). Asset quality was affected due to the second Covid wave, which hampered collections, thus driving elevated slippages. The restructured book remains under control ~0.25% of loans. The bank carries Covid-related provisions of Rs 1,280 crore (0.6% of advances).

ICICI Bank

ICICI Bank reported strong earnings performance, led by robust core PPOP, aided by healthy NII growth (5bp NIM expansion). Also, lower provisions drove the earnings. The bank is thus progressing well towards earnings normalization.

Fresh slippages stood elevated at Rs 7,230 crore (annualized 4% of loans), predominantly from the retail/business banking portfolio. However, this was partially compensated by higher recoveries and upgrades. The GNPA/NNPA ratio grew by 19bp/2bp QoQ to 5.15%/1.16%. PCR remains stable at 78.4%, the highest in the industry. Restructured loans stood controlled at 0.7% of loans versus 0.5% in FY21.

ICICI Bank holds Covid related provisions of Rs 6,425 crore (0.9% of loans), despite utilizing provisions of Rs 1050 crore in 1QFY22. It guided at improved asset quality trends mainly from 2HFY22.

Private banks hold on in second Covid wave in Q1, but retail stress grows

The steady mix of the high yielding portfolios such as retail/business banking portfolio, deployment of excess liquidity, and low-cost liability franchise is aiding margin expansion. Covid has disrupted collections, leading to elevated slippages in the retail/business banking portfolio. However, the management is confident of improved asset quality trends over FY22, mainly from 2H onwards. Restructured loans remain under control at 0.7% of loans. Provision coverage remains best in the industry and additional Covid provision buffer (0.9% of loans) provides comfort on normalization in credit cost. We expect RoA/RoE to improve to 1.8%/15.3% for FY23E.

Federal Bank

FB reported a net profit of Rs 370 crore in 1QFY22, led by strong other income (recovery from a written-off account and treasury gains of INR2.6b). It prudently deployed these gains towards provisions, which stood elevated at INR6.4b (63% YoY increase), to further strengthen its Balance Sheet.

The bank posted a moderation in business growth, with loans across most segments declining sequentially. Deposit growth was muted, while the CASA ratio touched ~35% (record high levels). The share of Retail deposits rose to 93% of total deposits. Around 60% of Retail slippages came from the Home loan portfolio, with the rest mainly from the LAP segment.FB expects slippages in FY22 to remain at a similar trajectory as the last two years.

Private banks hold on in second Covid wave in Q1, but retail stress grows
Its restructured book is fully secured. The bank expects LGDs to remain low. Most of its Retail restructured book constitutes Home loans, LAP, etc. Collections efficiency in this portfolio stands at 95%, which is in line with its other portfolio.

FB reported a slight moderation in business growth owing to a challenging environment and lockdowns across several states. However, the bank’s liability franchise remains strong, with Retail deposit mix ~93% and CASA ratio at a record high of 35%. On the asset quality front, slippages stood elevated from the Retail/Agri/SME segments as the second Covid wave has severely affected the Self-employed segment and impacted the rural economy as well. The bank prudently utilised higher treasury gains/one-off recovery from written-off accounts towards provisions to further strengthen its Balance Sheet and stabilise PCR.



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Net profit rises 94% YoY, misses estimate; NII rises 11%, BFSI News, ET BFSI

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MUMBAI: Axis Bank today reported a 94 per cent year-on-year rise in net profit to Rs. 2,160 crore for the quarter ended June, which was above analysts’ estimate.

The lender reported a 11 per cent on-year growth in net interest income to Rs. 7,760 crore in the reported quarter, which was also below Street’s estimate.

The lender saw a marked deterioration in its asset quality in the quarter likely due to the second wave of COVID-19 pandemic. The gross non-performing assets ratio stood at 3.85 per cent in the June quarter as against 3.7 per cent in the previous quarter.

Similarly, the net NPA ratio rose to 1.2 per cent in the quarter from 1.05 per cent in the previous quarter. The lender’s gross slippages in the quarter jumped 23 per cent sequentially to Rs. 6,518 crore and was nearly three times from the year-ago quarter.

As on June 30, the bank’s provision coverage, as a proportion of gross NPAs stood at 70 per cent, as compared to 75 per cent in the year-ago quarter and 72 per cent in the previous quarter.



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