Private banks’ NPA provisions surge in second quarter

The sequential increase is led by RBI’s audit of asset quality for FY17

The expectation of a stable asset quality profile for private banks has been shattered in the second quarter ended September 2017 (Q2) as the Reserve Bank of India (RBI) asked some banks to treat certain accounts as bad loans and accordingly make provisions.

Termed “divergence” in industry parlance, the difference in views over bad loans has hurt investor sentiment.

Gross non-performing assets (NPAs) of 13 private lenders that have declared their results so far in Q2 increased to ~96,987 crore by the end of the quarter from ~87,664 crore for the quarter ended June 2017 (Q1 FY18).

Gross NPAs were up sharply compared to ~68,197 crore at the end of the September 2016 quarter (Q2 FY17).

With bad loans up, provisions and contingencies (P&Cs) also shot up by 35.7 per cent from ~8,196 crore in Q1 FY18 to ~11,125 crore in the September quarter. However, P&Cs were down by 11.8 per cent year-onyear from ~12,616 crore to ~11,125 crore in Q2 of FY18.

Senior private sector bank executives said the rise in provisions was on three counts: One, the slippages in Q2; second, banks made incremental provisions for ageing bad loans; and thirdly, banks also set aside money for the assets which the RBI has asked them to treat as NPAs following the audit for FY17. The banking regulator asked some private banks to classify certain loans as NPAs for FY17 and accordingly make provisions. Three private lenders — Axis Bank, YES Bank, and Lakshmi Vilas Bank — were hit significantly in the quarter ended September 2017 by this directive.

Going by the RBI’s rules, if the regulator’s assessment of bad debt numbers for a financial year differs from the bank’s assessment by more than 15 per cent, the total divergence should be disclosed.

A senior RBI official said there was no change in methodology in calculating NPAs.

The divergence for 2015-16 was reported in May this year. However, the RBI decided to conclude the audit for 2016-17 soon after and asked banks to report on the divergence in the September quarter itself.

Though HDFC Bank did not face a significant impact of the RBI’s audit for divergence in gross NPAs, the banking regulator asked the bank to treat the advances to one project as a bad loan. As for ICICI Bank, the regulator is yet to conclude its audit. Details pertaining to this will reflect in the third quarter results ended December 2017.

Axis Bank, ICICI Bank and YES Bank had a major share in provisions, given their large balance sheets vis-à-vis the rest of the 10 banks. For ICICI Bank, Axis Bank DCB Bank Federal Bank HDFC Bank ICICI Bank IDFC Bank IndusInd Bank Karnataka Bank Kotak Mahindra Bank Lakshmi Vilas Bank RBL Bank South Indian Bank YES Bank Total

PRIVATE BANK’S FINANCIALS

NII Other income Total income Provisions* Net profit Gross NPA P&Cs saw a hefty 72 per cent increase at ~4,503 crore from ~2,609 crore.

ICICI Bank has made a provision -13.3 34.1 -14.8 of ~651.17 crore for the 12 accounts referred to the National Company Law Tribunal (NCLT). While the bank had the option to spread the provision burden over three quarters, it decided to make a one-time provision in the September quarter its self.

Axis Bank’s provisions surged to ~3,140 crore in Q2 FY18 from ~2,341 crore in the previous quarter.

YES Bank’s Q2 provisions moved up to ~447 crore from ~286 crore in Q1.

South Indian Bank saw a very sharp rise in provisions to ~453 crore in Q2 over ~224 crore in the June quarter.

Lakshmi Vilas Bank’s bill grew sequentially to ~187 crore from ~112 crore in Q1.

Thanks to the surge in bad loan provisions, the combined net profit of these 13 private banks dipped by 7.1 per cent to ~10,334 crore in Q2 FY18 compared to ~11,119 crore in June quarter. Net profit was up by just 1.1 per cent compared to ~10,222 crore in Q2 of FY17. Their net interest income (NII), the difference between interest earned and interest expended, rose by 3.2 per cent to ~29,225 crore in Q2 as compared to ~28,308 crore in June quarter; the same was up 15 per cent over the year ago period’s ~25,373 crore.

Other income comprising revenues from treasuries, fees, and commissions was a shade better with a 7.5 per cent rise in Q2 at ~16,159 crore as against ~15,025 crore in Q1 of FY18.

However, it was down 13.4 per cent compared to ~18,664 crore in Q2 FY17.