Profit Of Private Banks Beats Public Banks

Private sector banks’ profits set to leave PSU peers behind

Profits of 13 private sector banks for FY15 could outstrip the combined profits of 25 public sector banks, probably for the first time in the country's banking history.

Profits of 13 private sector banks for FY15 could outstrip the combined profits of 25 public sector banks, probably for the first time in the country’s banking history. While the private lenders have reported a total profit after tax (standalone) of Rs 37,361 crore, their state-owned peers have managed to earn Rs 34,640 crore, data from Capitaline show.

Bank of India (BoI) is yet to announce its numbers; consensus estimates of 40 analysts compiled by Bloomberg peg its net profit at Rs 2,374 crore, which is a shade lower than the gap between the public and private sector, of Rs 2,721 crore.

In FY14, public sector lenders had earned Rs 2,312 crore more than private banks but this time higher provisioning owing to the larger share of non-performing assets (NPAs) — 90% of the banking system NPAs — has resulted in the gap narrowing significantly. Total provisions made by private banks stood at Rs 10,852 crore while public sector lenders have had to set aside Rs 72,095 crore.

The gross NPA ratio — the percentage of loans that have gone bad — of PSBs stood at 5.47%, up 58 basis points (bps) while for private banks, it rose by 19 bps ratio to 2.01%. For instance, Bank of Baroda (BoB) and Punjab National Bank (PNB) have both seen their net profits halve in Q4FY15 owing to higher provisioning towards bad loans. While BoB’s bad loan provisions stood at Rs 1,491 crore in Q4 FY15, a huge 134% increase, its gross NPA was up 76 bps at 3.72%.

The worst may not be over. Ranjan Dhawan, MD & CEO, BoB, said recently that it was difficult to give an NPA outlook for FY16. “There are major corporates in great difficulty and there is a debate on whether a major corporate should be classified as an NPA or not. Hopefully, it will not happen in the next one to two quarters but if it happens, we will be hit by several hundred crores from a single company itself,” Dhawan conceded.

During the year, PNB had to provide Rs 7,979 crore, an increase of 76%; the management said on an analysts’ call it expects recoveries to go up, resulting in the write-back of the provisions. Gauri Shankar, PNB executive director and MD CEO, said, “If the provisions are so much, the amount is so huge, let there be some recovery and you will see that we are going to write back the provisions. Ultimately P&L is going to get the benefit.” Shankar listed the affected sectors as infrastructure, power roads ports and steel.

Earlier this month, RBI deputy governor SS Mundra observed the level of distress was not uniform across the bank groups and was “more pronounced in respect of public sector banks”.

A former public sector banker explained that even if banks were reporting lower slippages, the provisions could rise as some bad loans move from the substandard category to doubtful, attracting higher provisions. An account is classified as substandard if it remains an NPA for less than or equal to 12 months and requires 15% provisioning. It is classified as a doubtful asset after 12 months and the minimum provisioning requirement is 25% while the maximum is 100%.

In the case of State Bank of India (SBI), of the total provisions of Rs 25,812 crore in FY15, Rs 19,086 crore was for bad loans leading to a 21.6% rise in total provisions in FY15. Lenders have also said that as the economy did not pick up as expected, many companies were unable to service their debt, leaving no room for fresh credit demand. SBI chairman Arundhati Bhattacharya told analysts that with the slippage numbers still at 15%, “we are almost at the end of the difficult cycle and we are looking at growth”. She expects to grow SBI’s loan book by 14% in FY16 compared with 7.25% in FY15.

Meanwhile, finance minister Arun Jaitley, according to agency reports, has recently said that NPAs of public sector banks would come down gradually over the next two to three quarters. “So we are not claiming that situation has completely reversed. We believe that the situation will gradually improve after two or three subsequent quarters. We are also bringing professionals into the banking system and appointing them as directors,” he was quoted saying.

During the year, PNB had to provide Rs 7,979 crore, an increase of 76%; the management said on an analysts’ call it expects recoveries to go up, resulting in the write-back of the provisions. Gauri Shankar, PNB executive director and MD CEO, said, “If the provisions are so much, the amount is so huge, let there be some recovery and you will see that we are going to write back the provisions. Ultimately P&L is going to get the benefit.” Shankar listed the affected sectors as infrastructure, power roads ports and steel.
Earlier this month, RBI deputy governor SS Mundra observed the level of distress was not uniform across the bank groups and was “more pronounced in respect of public sector banks”.

A former public sector banker explained that even if banks were reporting lower slippages, the provisions could rise as some bad loans move from the substandard category to doubtful, attracting higher provisions. An account is classified as substandard if it remains an NPA for less than or equal to 12 months and requires 15% provisioning. It is classified as a doubtful asset after 12 months and the minimum provisioning requirement is 25% while the maximum is 100%.

In the case of State Bank of India (SBI), of the total provisions of Rs 25,812 crore in FY15, Rs 19,086 crore was for bad loans leading to a 21.6% rise in total provisions in FY15. Lenders have also said that as the economy did not pick up as expected, many companies were unable to service their debt, leaving no room for fresh credit demand. SBI chairman Arundhati Bhattacharya told analysts that with the slippage numbers still at 15%, “we are almost at the end of the difficult cycle and we are looking at growth”. She expects to grow SBI’s loan book by 14% in FY16 compared with 7.25% in FY15.

Meanwhile, finance minister Arun Jaitley, according to agency reports, has recently said that NPAs of public sector banks would come down gradually over the next two to three quarters. “So we are not claiming that situation has completely reversed. We believe that the situation will gradually improve after two or three subsequent quarters. We are also bringing professionals into the banking system and appointing them as directors,” he was quoted saying.

Link For Financial Express
Capital suggestion-Business Line 28 May 2015

In December 2011, a key advisory group on asset reconstruction companies (ARC) sector reforms, appointed by the government, had recommended, among others, thus: “Since ARC industry is capital intensive, and the existing investors lack adequate resources to fund the expansions, ARCs may be allowed to tap capital market. This will also increase public scrutiny and higher disclosures.”

 

The advisory group also suggested that ARCs may be allowed to raise equity from market in public issue of shares.

Tackling bad loans

This has assumed critical importance particularly after August 2014, when the Reserve Bank has raised mandatory investment in securities receipts issued by an ARC from 5 per cent to 15 per cent. Also, non-performing assets (NPA) in the banking system have been rising at a menacing pace. From a gross NPA level of ₹1.4 lakh crore in 2011-12, this is estimated now at ₹3.4 lakh crore as of March 2015.

 

On the one hand, gross NPAs have risen nearly three times, and on the other hand, there has been a three-fold rise in mandatory investment required by ARCs.

 

As per a recent study by rating agency Crisil released on May 12, 2015, gross NPAs in the banking system is projected to rise to ₹4 lakh crore. The ARCs with an estimated capital base of ₹4,000 crore only stand helplessly and grossly inadequate in terms of financial muscle to rise to the occasion.

 

This necessitates the ARCs to build up their capital base substantially for an effective participatory role in NPA sales. In fact, ARCs have been setup to acquire NPAs of banks or financial institutions with the objective of focused management and optimal recovery, thereby relieving banks and financial institutions of the burden of NPAs and allowing the banks to focus on core activities.

 

Another risk

In the Indian context, ARCs have been permitted to float Trusts for resolution of the NPAs acquired and funding is through issuance of security receipts which are akin to pass-through certificates with underlying cash flow from the NPAs acquired.

 

However, in the absence of third party investor money, the bank that sells NPAs doubles up as investor in security receipts — which is estimated around ₹53,000 crore, of which a substantial portion is invested by the selling banks themselves.

In effect, there is no effective risk mitigation at the bank; credit risk being only substituted by another risk — investment risk. For a real clean up of the system, fresh money should come in.

 

A meaningful and plausible solution is to decontrol ARCs by permitting them unrestricted access to capital market for equity and delinking investment in security receipts from only a select group of qualified institutional buyers (QIBs) and throwing it open for all institutional players in debt trading.

 

Further, provision like no sponsor being able to hold in excess of 50 per cent equity should be dispensed with, to enable promoters to bring in additional equity without dependence on another set of investors.

The author is President of UV ARC Ltd, Delhi. The views are personal

My Opinion On Profits of Public Sector Banks is as below

SBI has restructured loan aggregating to Rs11885 crore in fourth quarter and thus saved provision by Rs.1188 crore roughly. In addition to it,  SBI has sold bad debts valued Rs.4510 crore to ARC in the last quarter and shortfall of Rs.2800 crore approx has been amortised for two years. Roughly Rs.600 crore has been accounted for in Profit account of the year 2014-15 and rest Rs.2200 crore approx has been postponed for next financial year 2015-16. Volume of write off of bad loans and sacrificing of principal and interest on big amount compromise settlements is still unknown.

For this purpose RBI changed the rule of provisions at the fag end of financial year to help so called strong banks like SBI to come out of crisis. SBI took advantage of this amendment and shortfall in sale proceeds has not been fully accounted for in the financial year 14-15.
This is obviously a case of legal manipulation of financials and postponing the crisis for next year so that current CMD may get safe and respectful exit and retirement from Bank and hopefully may elevated as RBI Dy Governor. It is not SBI but all so called strong banks have manipulated the financials in the same way.

I therefore make an appeal to financial experts to make a through analysis of financials of SBI to find out whether there is actually cash recovery and upgradation of bad account or simply fraud with investors, taxpayers, depositors and borrowers of the bank. I do not trust and do not accept the claim of SBI that they have arrested slippages by concerted recovery from bad borrowers. Rather It will be appropriate to say that volume of hidden NPA is many times more than what has been declared by banks.

It is desirable to point out here that ,for last three consecutive years 2010-11 to 2013-14 gross NPA of SBI continued to rise . All of a sudden this year SBI reduced Gross and Net NPA perhaps without proportionate actual cash recovery. I hope RBI and SEBI will make deep scrutiny of the financials of all PSBs so that investors are made aware of truth of banks they bank with. Here  It is to be noted that return on advances has gone up slightly from 8.47% in 13-14 to 8.64% in 14-15 whereas return on investment has come down from 8.00% in 13-14 to 7.49% in FY 14-15.

CMD of public sector banks may retire by inflating profit and sharing dividend with investors and may get award from Ministry of Finance in form of incentives. But sooner or the later when bomb of bad debts will explode , it is customers of bank, staff of bank, investors of banks who will have to bear the impact of loss to bank. RBI and GOI should stop unhealthy practice and try to make bankers bold enough to say spade a spade. Bad debts are hidden for some time . But during this period bad borrowers dispose off the assets and banks suffer loss. so that bad debts are recovered in time . It is necessary to recover the money from bad borrowers in tie and without loss of time. Otherwise banks will loss heavy money as they are going to loss from defaulting customers like King fishers, Zoom Developers, GTL etc.