If the banks throw caution to the winds for building loan books, the hydra-headed bad loans may resurface and spoil the party, warns Tamal Bandyopadhyay.
Except for one, all banks had made profits in FY2022.
The combined net profit of the listed banks, at Rs 1.57 trillion, was at its historic high last financial year.
Many thought that the first quarter of FY23 would be a different story as treasury losses would eat into most banks' profits and a few could even end up being in the red.
The 10-year bond yield had risen 61 basis points (bps) in the June quarter -- from 6.84 per cent on March 31 to 7.45 per cent.
At some point during the quarter, the rise was as high as 80 bps.
One bps is a hundredth of a percentage point. Prices and yields of bonds move in opposite directions.
When the yields rise and prices drop, the banks need to book mark-to-market (MTM) losses for those securities that are not kept in the so-called held-to-maturity basket.
MTM is an accounting practice in which an asset is valued at the market price and not at the price it is bought.
So, when the prices drop, the banks have to provide for the difference between the purchase price and market price of bonds.
Despite treasury losses or drop in treasury income, the collective net profit of listed banks was Rs 43,472 crore (Rs 434.72 billion) in the June quarter, 35 per cent higher than the year-ago quarter.
Quarter on quarter (June over the March quarter), the net profit of the industry, however, has dropped 9.87 per cent.
In the pack of private banks, barring Dhanlaxmi Bank Ltd, all listed banks have posted net profits in the June quarter and, for all of them, it has been higher than the year-ago quarter.
The Thrissur-based private sector lender has reported a net loss of Rs 26.4 crore (Rs 264 million) against a Rs 6.8 crore (Rs 68 million) net profit in the corresponding period of the previous fiscal.
Both IDFC First Bank Ltd and RBL Bank Ltd have made profits against hefty losses in the year-ago quarter.
Sequentially, however, at least nine banks have shown a drop in their net profits.
HDFC Bank Ltd has posted the highest profit among the private banks (Rs 9,195.99 crore/Rs 91.95 billion), followed by ICICI Bank Ltd (Rs 6,904.94 crore/Rs 69.04 billion) and Axis Bank Ltd (Rs 4,125.26 crore/Rs 41.25 billion).
All public sector banks (PSBs) have made profits in the June quarter.
Three of them have recorded lesser profits than the year-ago quarter.
They are Punjab National Bank, Bank of India and State Bank of India.
Sequentially or quarter-on-quarter, however, six of 12 PSBs have recorded a drop in their net profits.
In this group, State Bank has posted the maximum profit (Rs 6,068.08 crore/Rs 60.68 billion), followed by Bank of Baroda (Rs 2,168.13 crore/Rs 21.68 billion) and Canara Bank (Rs 2,022.03 crore/Rs 20.22 billion).
The year-on-year net profits of the private banks have jumped 54.86 per cent compared with a meagre 9.24 per cent rise in PSB profits.
On a sequential basis, the private banks' net profits have dropped 7.86 per cent, less than 9.87 per cent of PSBs.
Barring very few, most banks' net interest income or the difference in their cost of deposits and earnings on loans has risen both year-on-year and sequentially.
Driven by growth in credit and rising loan rates, overall, the industry's net interest income has risen by 14.3 per cent to Rs 1.46 trillion in the June quarter from Rs 1.28 trillion in June FY22. In March 2022, it was Rs 1.42 trillion.
However, there is a sharp drop in the so-called other income that consists of fee income and treasury profits.
Other income of the listed banks in the June quarter has been to the tune of Rs 41,104 crore (Rs 411.4 billion) against Rs 57,413 crore (Rs 574.13 billion) in June FY22 and Rs 57,316 crore (Rs 573.16 billion) in March 2022.
The PSBs have suffered bigger treasury losses than their counterparts in the private sector.
As a result of this, their other income has dropped 45 per cent year-on-year and 40.4 per cent quarter-on-quarter.
In contrast, the drop in private banks' other income is just 4.4 per cent year-on-year and 14 per cent quarter-on-quarter.
At least four private banks -- IndusInd Bank Ltd, IDFC First Bank, Jammu & Kashmir Bank Ltd (J&K Bank) and City Union Bank Ltd -- have shown a rise in other income both year-on-year and quarter-on-quarter.
Ditto about Canara Bank and Central Bank of India in the pack of PSBs.
State Bank's other income dropped over 80 per cent and that of Indian Overseas Bank over 60 per cent both year-on-year and quarter-on-quarter.
Even though many banks have posted treasury losses, their fee income has covered the losses but it has not happened with two listed banks.
They are UCO Bank and Dhanlaxmi Bank. In the process, they have ended up making losses in other income.
Despite treasury losses and drop in other income, most banks have shown healthy profits by virtue of rising net interest income and, more importantly, a drop in provision for bad loans.
Their provisions were Rs 33,170 crore in the June quarter, 41.48 per cent down from the year-ago quarter and little over 13 per cent less than the March quarter.
For Karnataka Bank Ltd, the provision has risen both year-on-year as well as quarter-on-quarter; for Dhanlaxmi Bank, it has risen 130 per cent year-on-year.
Among PSBs, Central Bank and Canara Bank have shown higher provisions year-on-year. They are exceptions.
The gross bad loans of all listed banks in the June quarter have been Rs 7.16 trillion, 12.5 per cent down year-on-year and 1.35 per cent down quarter-on-quarter.
Post-provision, net bad loans have been to the tune of Rs 1.91 trillion, 25 per cent less than the year-ago quarter and close to 4 per cent down from the March quarter.
In percentage term, IDBI Bank Ltd has the highest gross bad loans (19.9 per cent), followed by Yes Bank (13.45 per cent), J&K Bank (9.09 per cent), Bandhan Bank Ltd (7.25 per cent), and Dhanlaxmi Bank (6.35 per cent).
After provision, Yes Bank's net bad loans have been 4.17 per cent and that of J&K Bank 3.02 per cent. IDBI Bank's net bad loans have been 1.25 per cent.
Only four listed private banks have posted higher net bad loans in the June quarter over March.
They are J&K Bank (3.02 per cent), Bandhan Bank (1.92 per cent), HDFC Bank (0.74 per cent) and IndusInd Bank Ltd (0.67 per cent).
Among PSBs, Central Bank has the highest gross bad loans -- 14.9 per cent; both Punjab & Sind Bank and PNB have over 11 per cent gross bad loans, followed by Union Bank of India (10.22 per cent), Bank of India (9.3 per cent) and Indian Bank (8.13 per cent).
After provision, PNB has the maximum net bad loans (4.28 per cent), followed by Central Bank (3.93 per cent) and Union Bank (3.31 per cent).
All banks have posted lower net bad loans. Bank of Maharashtra has just 0.88 per cent net bad loans and State Bank of India 1 per cent.
Yes, treasury losses have pulled down the profits of many banks, but the good story is the continuous improvement in the quality of assets and arrest of fresh slippages.
With healthy credit growth (14.5 per cent), bad loans will shrink further in percentage terms but if the banks throw caution to the winds for building loan books, the hydra-headed bad loans may resurface and spoil the party.
Feature Presentation: Rajesh Alva/Rediff.com
Tamal Bandyopadhyay, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.
