Buoyed by strong treasury gains, banks have registered healthy profit growth. But asset quality concerns remain, especially for PSU banks

With the earnings season drawing to a close, banks have wrapped up the second quarter with positive surprises on the margins front and some blushes on the asset side. While net interest margins showed marked improvement, by 10-20 basis points sequentially, business volumes floundered as credit offtake was muted. Asset quality continued to be a matter of concern, especially for state-owned banks whose growing restructured books are showing signs of slippages.

There was a marked slowdown in advances growth in the September quarter, as banks went slow on disbursements of home, auto and consumer loans. Loan growth was only 9 per cent y-o-y. “Even top private sector banks, like ICICI Bank, are going slow on retail lending;’ says Bhavesh Kanani, analyst at Sharekhan, a local brokerage firm. “1 expect credit offtake to be somewhat muted in the third quarter, but it should revive from the fourth quarter.


Though the growth in advances was muted, banks reaped the benefits of bulk deposits being repriced at an all-time low of 5-6 per cent. Coupled with the increased focus on current accounts-savings accounts (CASA) — the source of low-cost deposits for banks — this resulted in an improvement in net interest margins.

Mudit Painuly, analyst at Macquarie Securities, however, is cautious, especially on CASA as he thinks this may not be sustainable. “Most banks have seen a quarter-on-quarter improvement on low-cost deposits, partly due to factors such as the payment of pay commission arrears, IPO-related floats and a reduction in higher cost deposits. The ratio should come down in the forthcoming quarter, though banks will have to continue deposit garnering with vigour, to support the credit growth projected for the second half of the fiscal;’ says Painuly. Banking analysts are expecting credit growth in the range of 18-22 per cent beginning from the fourth quarter.

Asset blues
Despite expectations of a better credit offtake, asset quality remains a concern especially for public sector banks. Under the restructuring scheme, banks have either rescheduled repayment periods or changed interest rates, to help borrowers overcome the difficult economic conditions. As of September 30, the proportion of such restructured accounts to a bank’s total loan book varied from a low of 0.26 per cent, in the case of HDFC Bank, to as high as 6 per cent for Punjab National Bank (PNB).

The large restructured account of PNB, the country’s second largest PSU bank, is a cause for concern. Other nationalised banks that have high restructured accounts in absolute terms include the State Bank of India (Rs 21,792cr), IDBI Bank (Rs 9,000 cr), Bank of India (Rs 8,538 cr) and Union Bank of India (Rs 4,580 cr). In the private sector, restructured loans of lOG Bank and Axis Bank stood at Rs 4,857 crore and Rs 2,363 crore, respectively.

However Kanani of Sharekhan is not too worried over restructured assets. “While it is true that there have been some slippages on the restructured books, with export firms not able to pay up, the banks capital adequacy ratio is still healthy, and they have been able to classify slippages as NPAs already,” he said.