Banking. July 25, 2014

Transcription

1 July 25, 2014 Banking BANKING SECTOR PERFORMANCE STUDY FY14 Our study covers 39 banks 26 Public Sector Banks & 13 Private Sector Banks. Foreword The in the Indian economy continued to be moderate in FY14 as reflected by the advance estimates of GDP of 4.9% marginally higher than the 4.5% of FY13. India s Index of Industrial Production contracted by 0.1% in FY14 vis-à-vis a weak of 1.1% in FY13 reflecting a decline in the country s economic activity. The overall decline in the country s industrial sector can be attributed to the contraction in output in mining (-0.8%) and manufacturing (-0.8%) sub-sectors. Capital and consumer goods segment, both witnessed a decline of 3.7% and 2.6%, respectively. During FY14, the interest rates remained at an elevated level especially post July 2013, when the Reserve Bank of India (RBI) recalibrated Marginal Standing Facility rate at 300 bps above repo rate at 10.25% to curb the volatility in the exchange rate. This resulted in sudden spike in market interest rates and market participants incurred a Mark to Market (MTM) loss on their positions. Further to manage inflationary pressures, RBI raised the repo rate thrice since September 2013 from 7.25% to 8.00%. Against this macroeconomic backdrop, the banking sector was severely impacted with low credit demand, pressure on asset quality which led to decline in income and increase in provisions which ultimately resulted in impact on profitability. There was also an increase in the restructured assets in the banking book in sectors which got impacted severely in this economic slowdown. Asset quality continued to be a cause of concern Asset quality problems of the banking sector got accentuated in FY14 which took a toll on the overall health of the banking sector. The Gross NPAs of the banks under study showed an increase of 35.5% (yo-y) in FY14 vis-à-vis credit of 14.5% (y-o-y) during the same period. The Gross NPAs of the Public Sector Banks (PSBs) saw an increase of 38.2% while that of the private sector banks was comparatively lower at 13.6%. Overall Gross NPA ratio has risen from 3.26% as on March 31, 2013 to 3.85% as on March 31, On comparing the asset quality of PSBs vis-à-vis private sector banks, it can be observed that PSBs have witnessed higher deterioration in asset quality than their private sector peers. The Gross NPA ratio for PSBs stood at 4.33% (March 2013: 3.59%) as compared to 1.82% (March 2013: 1.86%) for private sector banks as on March 31,

2 Overall Public Sector Banks Private Sector Banks Gross NPA Ratio Net NPA Ratio Net NPA / Net Worth Rest. Advances / Advances In addition to higher NPAs, PSBs also had a large amount of restructured advances which stood at 7.06% of advances (March, 2013: 7.05%) as on March 31, The restructured advances are accounts which have seen stress and there is a higher probability of them turning into NPAs. The restructured advances as a proportion of advances stood comparatively lower at 2.48% (March 2013: 1.71%) for private sector banks as on March 31, An industry-wise analysis of NPAs shows that the major industries which have been putting pressure on asset quality are infrastructure (especially power), iron & steel, textiles and aviation. During FY14, some of the banks have sold their NPAs to Asset Reconstruction Companies (ARC). The banks under study sold assets of around Rs.10,000 crore to ARCs during FY14 as compared to around Rs.500 crore during FY13. Assuming, these assets sold were part of the banks books the Gross NPA ratios would be higher by 30 bps. The following graph shows the trend of Gross NPA and restructured advances from March 2012 to March Figure 1. Trend in Gross NPA ratio and Restructured Assets to Advances ratio Source: CARE, Banks Banking Performance Study 2

3 Restructured assets book has consistently increased from Rs.2.6 trillion at the end of FY12 to Rs.3.9 trillion as on March 31, The major sectors contributing to restructured accounts were Infrastructure, Power, Iron & Steel, Textiles and Aviation. An analysis of the progress report of the Corporate Debt Restructuring (CDR) Cell during the period March, 2012 to March, 2014, shows that the major sectors where maximum cases of restructuring have been approved are iron & steel, infrastructure, textiles and power. The following table shows the amount approved under CDR for the top four industries during FY12 to FY14 and their percentage share in the total amount approved for CDR. (Rs crore) Industry 31-Mar-12 % share 31-Mar-13 % share 31-Mar-14 % share Infrastructure 16, , , Iron & Steel 39, , , Power 4, , , Textiles 11, , , Total 150, , , Source: Note: These amounts do not account for the restructuring done by banks on a bilateral level Total amount approved under the CDR package increased on a y-o-y basis by 5.8% in FY14 as compared to a stupendous rise of 52.2% in FY13. There was a decline in the of restructured assets, since RBI allowed withdrawal of restructured accounts upon satisfactory conduct for the specified period resulting in older restructured accounts moving out of CDR. Credit As per RBI s weekly statistical supplement, credit of Scheduled Commercial Banks (SCB) on a y-oy basis as on April 4, 2014 stood at 13.8% which was slightly lower than 13.9% witnessed in FY13. From a sectoral point of view, agriculture & allied activities saw a credit of 13.5% (FY13: 7.9%), industries % (FY13: 15.1%), services % (FY13: 12.6%) and personal loans % (FY13: 14.7%). Banking Performance Study 3

4 The following table shows the credit percentage for public sector banks and private banks covered in our study. Advances 31-Mar Mar Mar-14 Overall 47, , , Public Sector Banks 38, , , Private Sector Banks 8, , , Deposit As on April 4, 2014, SCBs showed a deposits of 15% (y-o-y) as compared to 13.1% for FY13. Term deposits recorded a of 14.97% (FY13: 14.2%) as compared to a of 15.21% (FY13: 4.8%) registered by demand deposits. The following table shows the deposit percentage for public sector banks and private banks covered in our study. Deposits 31-Mar Mar Mar-14 Overall 60, , , Public Sector Banks 50, , , Private Sector Banks 10, , , The proportion of low cost Current Account Saving Account (CASA) deposit stood at 32.0% as on March 31, 2014 as compared to 32.9% as on March 31, 2013 for the banks under study. The CASA proportion for public sector banks was 30.5% (P.Y.: 31.7%) and for private sector banks it was 38.89% (P.Y.: 38.5%) as on March 31, The high proportion of CASA deposits among private sector banks is largely driven by large private sector banks. Banking Performance Study 4

5 Financial performance for the year ended March 31, 2014 Pressure on margins and asset quality stress has impacted profitability especially for public sector banks The 39 banks covered in our study showed that the in total income continued to show moderation to 12.5% (y-o-y) during FY14 as compared to 15.7% (y-o-y) during FY13. The overall Profit After Tax (PAT) declined by 11.3% (y-o-y) during FY14 as compared to of 10.0% during FY13. Growth % Net Interest Margin (NIM) Return on Total Assets (ROTA) Category FY12 FY13 FY14 FY12 FY13 FY14 Overall Public Sector Banks Private Sector Banks The impact of moderation in credit and slowdown in the manufacturing and core sector was largely felt by the public sector banks as they were unable to maintain spread in FY14. The Net Interest Margin (NIM) for public sector banks declined to 2.45% for FY14 as compared to 2.58% for FY13. NIM was also impacted partially due to interest reversals on NPAs with large addition of NPAs during the year. Due to contraction in margins coupled with rise in provisioning (mainly for NPAs) on account of worsening asset quality and rise in operating costs the profitability of public sector banks was impacted. The public sector banks under study reported de- of 26.8% in Profit After Tax (PAT) during FY14 as compared to of 2.2% in FY13 over FY12. Public sector banks other than the State Bank of India (SBI) group reported de- of 28.9% in PAT for FY14. Of the 26 PSU banks under study, only four banks reported a rise in PAT of 15.5% over FY13. Two public sector banks reported a net loss in FY14. The private sector banks were able to maintain their margins and asset quality due to which they were able to report a of 18.2% in PAT for FY14. In fact for private sector banks there was a marginal improvement in NIM and ROTA in FY14. The provisioning cost (excluding provision for Income Tax) for banks under study increased by 36.6% (yo-y) in FY14. Overall provisions for public sector banks increased by 37.9% and for private sector banks the provisions increased by 25.6% during FY14. The provisioning cost as a proportion of operating profit (NII plus other income minus operating expenses) stood at 61.3% for PSBs as compared to 15.4% for private sector banks for FY14 indicating credit costs largely impacted the profitability of PSBs. Banking Performance Study 5

6 To summarize, the profitability of the public sector banks was largely impacted on account of slowing economy leading to weakening of income profile, pressure on margins and higher provisioning on account of weakening asset quality. On the other hand, the private sector banks continued to show stable in income and were able to maintain profitability and asset quality. Capital Adequacy Capital Adequacy remained comfortable but need for raising additional capital to meet Basel III norms The capital adequacy levels for the select banks continued to be comfortable with strong levels of core (Tier I) capital. The overall median CAR stood at 11.54% as on March 31, 2014 as compared to median CAR of 12.59% as on March 31, As mandated by the RBI, Indian banks started computing and reporting CAR under Basel III from quarter ended June 30, The median Tier I CAR under Basel III was at 8.86% with the median Tier I CAR for private sector banks being higher at 12.62% as on March 31, 2014 which was higher than stipulated minimum of 6.5% as on March 31, 2014 during the transition phase of fully shifting to Basel III by March 31, Category Median CAR Median Tier I CAR Basel II Basel III Basel II Basel III Overall Public Sector Banks Private Sector Banks Capital requirement for complying with the Basel III requirements In order to comply with the Basel III norms Indian banks would be required to raise substantial quantum of capital in the next five years. As per CARE s estimates, the total equity capital requirement for Indian banks till March 2019 (when Basel III would be fully implemented) is likely to be in the range of Rs trillion assuming average GDP of 6% and the average credit is in the range of 15% to 16% over the next five years. It is also estimated that the banks will earn a return on total assets at 0.6% and would maintain some cushion over the minimum regulatory requirement of CAR. In the Budget , the Government indicated that it would continue to maintain the majority shareholding in public sector banks while increasing the autonomy and accountability of the banks. This is a credit positive for the banks. The interim budget had an allocation of Rs.11,200 crore for capitalisation of public sector banks, however, a large part of capitalisation of the banks now would be Banking Performance Study 6

7 through capital markets. Also, currently the market appetite for Additional Tier I debt instruments permitted under Basel III is low considering stringent loss absorption features of the instruments. This may pose a challenge for banks and some of the banks may have to rely on raising core equity capital. Outlook During FY15, the RBI is likely to keep its focus on inflation in view of uncertain monsoon, due to which the interest rates are likely to remain more or less stable during the year. CARE s GDP forecast for FY15 is between 5 % to 5.5% considering the new government s plan to focus more on investment in infrastructure, time bound action and improved co-ordination between the Central and State Governments to ensure smooth implementation of new Government policies. However, the recovery is expected to remain gradual in nature. Improvement in overall economic and governmental clearances in projects would help recovery of the sectors like infrastructure and manufacturing which in turn would help credit. The credit is estimated in the 15% - 16% range while deposit is estimated at around 14% to 15% during FY15 in tandem with the credit. Improvement in economic environment is expected to reduce the stress on the asset quality of banks and reduce the pace of NPA addition, which in turn is expected to improve profitability of the banks. However, the improvement would be gradual and would reflect in the second half of FY15. The Gross NPA ratio is estimated to be marginally higher at around 4% by end of FY15 as against 3.85% as end of FY14. The capital adequacy levels for the select banks continued to be comfortable during FY15. However, going forward, the banks especially public sector banks would require to raise additional equity in order to meet the more stringent Basel III norms and also maintain a cushion over the regulatory minimum. Contact: Anuj Jain Aditya Acharekar Pankaj Naik Asst. Gen Manager Sr. Manager Manager anuj.jain@careratings.com aditya.acharekar@careratings.com pankaj.naik@careratings.com Disclaimer This report is preparedby the Banking Division of Credit Analysis &Research Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report. Banking Performance Study 7