With the Reserve Bank of India scrapping restructuring schemes in a February 12 circular, private banks have reported a decline in net profit for the March quarter, as they had to provide more amounts towards bad loans. The Q4 results of private banks were a mix bag with some big names and smaller private banks disappointing while a few reporting better numbers.
The fourth quarter ended March 31, 2018 saw ICICI Bank, Axis Bank making upfront a substantial part of their watchlist exposure into non-performing assets (NPAs). With large parts of the stressed assets recognised, the focus now shifts towards growth. On the other hand, the performance of HDFC Bank, Kotak Bank, Yes Bank and IndusInd Bank was particularly strong, showing superior top line growth and lower-than-estimated credit costs. Importantly, the strength of their balance sheets showed, with asset quality comfort and growth across key parameters such as loan growth, CASA and fees witnessing sustained strong growth. Smaller private banks such as Federal Bank, South Indian Bank and Karnataka Bank disappointed with a large part of their restructured loans slipping into NPAs.
The February 12 circular from the RBI scrapped six stressed non-performing asset restructuring schemes, such as Corporate Debt Restructuring, Strategic Debt Restructuring (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A) and Framework for Revitalising Distressed Assets, Joint Lenders Forum and the 5/25 loan scheme, among others.
“For banks such as ICICI and Axis Bank while most of the pain has been recognised, a large part of the restructured loans slipping into NPAs means that the credit cost will remain elevated for two-three quarters. So our preferred picks are ICICI Bank, HDFC Bank, Yes Bank and IndusInd Bank. Axis Bank we need to watch out while among public sector banks, we prefer State Bank of India (SBI),” said R Sreesankar, head of Institutional equities at Prabhudas Lilladher.
ICICI Bank, India's third-largest lender by assets, posted a near 50 per cent drop in its fourth-quarter net profit as its provisions for bad loans surged. Net profit for the three months to March 31 fell to Rs 1,020 crore from Rs 2,025 crore a year earlier. Gross bad loans as a percentage of total loans was 8.84 per cent at the end of March, compared with 7.82 per cent at the end of the previous quarter and 7.89 per cent a year earlier. Domestic loan growth sustained (+15 per cent YoY) while net interest margins (NIMs) improved 10 basis points sequentially (3.24 per cent). The watchlist nose-dived to around Rs 4,720 crore (vs around Rs 19,060 crore in 3Q) and net stress reduced substantially (around 6 per cent versus 9.9 per cent YoY). Creditable current account, savings account (CASA) addition (Rs 43,100 crore in FY18), steady growth in retail loans (21 The watchlist nose-dived to around Rs 4,720 crore YoY), fees (+16 The watchlist nose-dived to around Rs 4,720 crore) and controlled opex (+9 The watchlist nose-dived to around Rs 4,720 crore) were also encouraging.
“We believe the stress recognition process for ICICI Bank is nearing completion. The bank’s retail engine (assets, liabilities and fees) and stake sales in subsidiaries have supported provisioning (and reported profits) despite the all-too-obvious stumble in the corporate book. A welcome move to more prudent underwriting (87 per cent of incremental corporate disbursals are A- and better) will boost performance hereon. We expect RoAAs (return on average assets) to pull back 36 bps over FY18-20E as a result. Maintain Buy with a target price of Rs 377 (1.7x Mar-20 core absolute book value of Rs 150 and sub-value of Rs 122),” said Darpin Shah, banking analyst at HDFC Securities.
On the other hand, peer private lender Axis Bank disappointed analysts as it reported its first ever quarterly loss at Rs 2,189 crore for the quarter ended March 2018 due to a three-fold rise in provisions. The bank said that its accelerated recognition of bad loans (particularly in the power sector) had led to a rise in provisioning. The central bank’s new guidelines for resolution of stressed assets also drove the recognition in its restructured book, it said. The bank had posted a net profit of Rs 1,225.10 crore in the corresponding quarter last year. This is the first ever quarterly loss reported by the bank in the last 20 years. The bank was listed in 1998.
For the financial year ended March 31, Axis Bank posted a 93 per cent fall in net profit to Rs 276 crore. Gross non-performing assets (GNPA) rose to 6.77 per cent of the total loans at the end of the March quarter, from 5.28 percent at the end of December. The net NPA ratio worsened to 3.4 percent from 2.5 percent. As on March 31, 2018, the bank’s GNPA was Rs 34,249 crore and net NPA was Rs 16,592 crore. Slippages for Q4FY18 stood at Rs 16,536 crore (Rs 13,938 crore from corporate lending). The bank’s watchlist fell 92 per cent and stood at Rs 428 crore during the quarter.
“We retain Hold on Axis Bank with TP (target price) revised lower to Rs 520..We have revised our FY19-20E estimates on the slippages and credit cost front. The bank is starting on a clean slate as a major part of stressed assets (one of the overhang on the stock) is behind. We expect RoE to inch towards 14-15 per cent levels by end-FY20E. Valuations at 1.9x FY20E ABV (adjusted book value) appear reasonable. Succession of a new CEO remains a near-term overhang. Margin compression or higher than expected credit cost could impact earnings and thus the multiples. On the flip side, higher-than-expected recoveries/decline in loan loss provisions will be positive,” said Aalok Shah, banking analyst at Centrum Broking.
In stark contrast, HDFC Bank posted 20.27 per cent year-on-year growth in net profit at Rs 4,799.28 crore --its highest ever quarterly profit for the January-March quarter--driven by stable asset quality. The bank had posted a net profit of Rs 3,990.09 crore for the corresponding quarter last year. Asset quality remained stable, as the percentage of gros non-performing assets (NPA) came in at 1.30 per cent against 1.29 per cent on a sequential basis and compared with 1.05 per cent a year earlier.
Federal Bank missed analyst expectations to report a 43.5 percent year-on-year drop in net profit at Rs 145 crore for the March quarter because of early recognition of NPA and a 203 per cent increase in provision YoY.
Shyam Srinivasan, MD and chief executive of Federal Bank said the revised framework for the resolution of stressed assets has impacted the bank’s bottom line. Federal Bank has made accelerated recognition of sensitive assets and treated them as NPAs and made provisions for it.
The provisioning for bad loans and contingencies grew three times in Q4FY18 to Rs 371 crore from Rs 122 crore in Q4FY17.