PremiumMUMBAI : Public sector banks reported higher profitability in the June quarter, aided by better margins, one-off gains from the United Breweries (UB) stake sale, healthy treasury gains, and lower operating expenses, as the bulk of wage arrears and pension-related provisions are largely behind, analysts said.
“Q1FY22 was marked by tepid growth and slightly worse-than-expected asset quality deterioration in the secured retail, small and medium enterprise (SME) segments, which led to elevated provisions and hurt profitability. Most banks preferred to build and carry forward covid-19 provisions, but for select banks such as ICICI Bank," analysts at Emkay Global said in a report on 20 August.
Among state-owned banks, State Bank of India (SBI), Bank of Baroda (BoB), Indian Bank, and Canara Bank were clear outliers, and among private banks, ICICI Bank was a clear outlier in terms of growth, asset quality and profitability, and it carries a strong provision cover. The report said that Federal and Karur Vysya banks were outperformers among small- and mid-sized banks.
According to Emkay Global, most banks indicated improving collection trends from July 2021 across retail business segments, though some states, such as Kerala, Assam and West Bengal, saw a late pick-up due to prolonged lockdowns.
However, banks expect some bad loans from the inflated special mention account (SMA) pool to spill over into the September quarter, while the restructuring pool, too, should inch up.
“Collection activity may return to the pre-covid level in Q3, subject to no severe covid-19 third wave. Within retail, recovery rates should improve in secured mortgages and gold loans as stress formation in those segments was higher than expected due to impaired mobility, which has normalized now," it said.
Meanwhile, credit card performance was better as lenders had already recognized vulnerable customers after the first wave and offered early easy equated monthly instalment (EMI) options. However, personal loans, loans against property, commercial vehicle and two-wheeler loans could see prolonged stress.
“Though lumpy corporate bad loan formation is largely behind, the risk of stress is emerging in select weak corporates (pre-covid) such as Vodafone and Future Retail. Although these exposures may not turn non-performing assets (NPAs) soon, banks may shore up provisions at least on Vodafone. That said, public sector banks could see optical improvement in NPAs due to the transfer of NPAs to the National Asset Reconstruction Company Ltd (NARCL) in Q2," the report said.
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