Bad Debt Worries

Money Today looks at the second quarter results of banks to see if it's the right time to buy bank stocks.
Sarbajeet K Sen/Money Today | Print Edition: December 2013
Bad Debt Worries

It has been a mixed bag for banks in the second quarter (July-September) with public sector banks lagging their private sector counterparts. State Bank of India, or SBI, the country's largest bank, reported a 35% drop in net profit to Rs 2,375 crore. The country's second-largest public sector bank, Punjab National Bank, or PNB, reported a 52.56% fall in net profit to Rs 505.49 crore, from Rs 1,065 crore in the corresponding quarter a year ago. Bank of Baroda's, or BoB's, profit fell 10.24% to Rs 1,168.10 crore during the period.

Private sector banks fared better. ICICI Bank's net profit rose 20.24% to Rs 2,352.05 crore on the back of 7.54% rise in income to Rs 12,979.75 crore. Axis Bank reported a 21.2% increase in net profit to Rs 1,362.31 crore, from Rs 1,123.54 crore in the corresponding quarter last year. HDFC Bank posted a 27% increase in net profit to Rs 1,980 crore.

One big reason for the fall in profits of PSU banks was increase in provisioning for non-performing assets or NPAs. For instance, SBI's provisions and contingencies rose 65.90% to Rs 3,028 crore while PNB's surged 76.81% to Rs 1898.73 crore. BoB's provisions and contingencies rose 33.17% to Rs 860.83 crore.


Banks continue to face the pressure of NPAs due to sluggish economy. SBI's net NPAs were 2.91% of net advances as on 30 September 2013 compared with 2.83% on 30 June 2013 and 2.44% on 30 September 2012. BoB's net NPAs were 1.86% on 30 September 2013 as against 1.69% on 30 June 2013 and 0.82% on 30 September 2012, while PNB's net NPAs were 3.07% on 30 September 2013 as against 2.98% on 30 June 2013 and 2.69% on 30 September 2012.

Even private sector banks reported slippages. ICICI Bank's net NPAs were Rs 2,707 crore on 30 September 2013, compared to Rs 2,472 crore on 30 June 2013. The net NPA ratio was 0.73% as on 30 September 2013, higher than the 0.69% on 30 June 2013. Axis Bank also reported a marginal deterioration in net NPAs at 0.37% as against 0.35% on 30 September 2012.

"Asset quality follows the lag in the economic cycle. From high growth between 2003 and 2010, we have moved to 5-6% GDP growth, which has increased asset quality issues. Our economist believes that growth has bottomed out and expects improvement in the second half of the year. Accordingly, we expect that asset quality will witness positive trends by 2014-15. However, near-term pressure is likely to continue," says Alpesh Mehta, banking analyst, Motilal Oswal Securities.

Aviral Gupta, founder & investment strategist, Mynte Advisors, is not very optimistic about the sector. "Asset quality indicators continue to deteriorate and will likely reach levels that are much worse than previously expected due to further weakening of the economic environment," he says.


The banks saw decent lending and deposit growth despite a less-thanfavourable business and economic environment. SBI's advances grew 19.8% year-on-year from Rs 9,56,000 crore to Rs 11,39,326 crore. Low-cost current account savings account (CASA) deposits were 43.58% of total deposits at the end of September 2013, of which savings bank deposits were at an all-time high of Rs 4,45,443 crore.

PNB's net advances grew 6.5% from Rs 2,94,787 crore to Rs 3,13,788 crore. Deposits rose from Rs 4,00,747 crore to 4,05,699 crore. CASA deposits increased 9% from Rs 1,43,429 crore to Rs 1,56,382 during the period.

Private sector banks also did decent business. ICICI Bank's advances rose 16% and stood at Rs 3,17,786 crore on 30 September 2013 as against Rs 2,75,076 crore on 30 September 2012. The year-on-year growth in domestic advances was 14%. The bank's CASA ratio was 43.3% at the end of September 2013.


Stocks of banks, both private and public, however, have been facing a lot of pressure recently, with public sector banks worse off than the private sector ones. As on November 12 (a day before SBI announced its quarterly results), the bank's shares closed at Rs 1,675, 32.4% lower than their 1 January 2013 level of Rs 2,476. The stock is now 52% below its all-time high of Rs 3,515 touched on 11 November 2010.

The PNB stock has fallen 43% this year. It was at Rs 504 on November 12 as against Rs 891 on January 1. It is 63.8% down from its all-time high of 1,395. BoB has slid 35% since the start of the year from Rs 883 to Rs 576. Its life-time high is Rs 1,050.

The performance of private sector banks has been better, though they, too, have been beaten down. On November 12, ICICI Bank was 12.6% lower than its January 1 level of Rs 1,159; its life-time high is Rs 1,465. Similarly, Axis Bank ended 23% lower at Rs 1,049, as against Rs 1,362 on January 1. Its all-time high is Rs 1,608. HDFC Bank fared better than competitors with its shares falling 5.7% to Rs 645 from Rs 684 at the start of the year. The stock is only 11.2% lower than its all-time high of Rs 727.


Are banks good bets, and if so, which are the ones you should buy? While experts seem to be bullish on the sector over the long run, short-term worries remain.

"Things have started normalising on the macro side with current account deficit under control, rupee remaining stable and improvement in decision-making on some critical infrastructure projects. All these factors are positive for financials. We are positive on the sector," says Alpesh Mehta, banking analyst, Motilal Oswal Securities.

Hemant Kanawala, head of equity at Kotak Mahindra Old Mutual Life Insurance, agrees. "The overall environment for banks seems to be changing for the better compared to the last quarter and, hence, there has been a rally in their stocks. The performance from here onwards will depend upon GDP growth as it has a direct impact on asset quality of banks. There are expectations that GDP growth has bottomed out, which will help banks," he says.

Alpesh Mehta says that PSU banks could be good bets for the long term. "We believe there is significant value in some PSU banks from the medium- to long-term perspective," he says.

S Ranganathan, head, research, LKP Securities, however, takes a different view. "Most PSU banks are low on Tier-1 capital, which constraints growth. With asset quality showing no sign of improvement, provision coverage ratios continuing at low levels and corporate debt restructuring pipeline becoming longer, we remain cautious on staterun banks," he says.

Aviral Gupta of Mynte prefers private banks. "They are likely to give better returns due to lower NPAs, aggressive management and ability to protect margins. But I will be wary of private sector banks which have high FII holding. This is because once the QE tapering starts and in case uncertainty increases after the general elections, FIIs many pull out money from India, hitting these banks, for instance, Axis Bank, Yes Bank and IndusInd Bank, the hardest," he says.

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