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NPL provisions drag down Q3 earnings

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The State Bank of India's regional office in Kolkata   © Reuters

MUMBAI -- Bad loan provisions hit India's largest lender, State Bank of India, in the quarter ended December, bringing net profit down by 62% to 11.2 billion rupees ($164 million), the company said on Thursday.

     The lender's gross non-performing loans increased to 5.1% of total assets in the third quarter from 4.90% in the preceding quarter. The NPL ratio, though, was better than market expectations.

     Advances rose by 12.9% to 13.91 trillion rupees, while deposits increased by 10.7% to 16.71 trillion rupees during the three months ended December.

     Slippages -- the difference between price expectation and actual execution price -- for the quarter came in substantially higher at 206.92 billion rupees, compared with 58.75 billion rupees in the preceding quarter.

     State Bank of India chairman indicated that asset quality would continue to remain stressed for some time.

     "Most of the pain, whatever is there, will be taken within this financial year (ending March) but some may continue in the next financial year too," said Arundhati Bhattacharya, chairman of State Bank of India.

     According to Angel Broking's banking research Vice-President Vaibhav Agarwal, the decline in profits could be taken as positive evidence that the bank was sorting out its bad loans.

     He said part of the reason for the slippages could be attributed to Reserve Bank of India's directive asking banks to re-classify some loans and make higher provisions for bad assets for the third and fourth quarters.

     "Given the size of the balance sheet, SBI has fared well compared to other [public sector] banks. The bank certainly will need capital for meeting future growth; again on this count also it stands better than other public sector banks. Though stress is likely to persist in the system, SBI is better positioned to meet the challenges given its decent capital adequacy of 12.45%," Agarwal said in a report.

     Indian banks, especially those run by the government, have been grappling with troubled assets for several quarters as many infrastructure companies as well as those in the iron and steel industries continue to miss their loan payback schedules. 

     Speaking at a banking conference on Thursday, Reserve Bank of India Governor Raghuram Rajan said that public-sector banks must clean up their balance sheets before they can function properly and lend to companies, which will allow them to expand and in turn, spur economic growth.

     "Indeed, this [campaign to sort out NPLs] is the lesson from every other country that has faced financial stress," he said. "The government is taking direct action to clear bottlenecks and revive stalled stressed projects, and intends to support them with equity infusion ... Private well-funded players are looking to buy assets ... All this activity bodes well for the success of the clean-up".

     Indian ratings agency CRISIL said that as much as 85% of the banking system's weak assets are in the books of public sector banks. It also said that total weak assets of banks would rise to 5.3 trillion rupees or 6.3% of total advances by the end of March.

     Some state-run lenders such as Central Bank of India and Allabahad Bank posted losses during the quarter for the same reason of higher provisioning for NPLs. Punjab National Bank managed to report a profit during the quarter but largely due to a tax benefit of about 9.08 billion rupees.

     In the private sector, India's largest ICICI Bank's net profit grew by a marginal 4% to 30.18 billion rupees in the third quarter ended in December. Gross NPL stood at 4.72%, against 3.77% a quarter ago.

Its counterpart HDFC Bank, however, managed to keep the NPL ratio at 0.97% in the December quarter. The subsidiary of top mortgage lender, HDFC, posted a 20% increase in net profit at 33.57 billion rupees.

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