Worsening asset quality weighs on PNB and Indian Bank

Punjab National Bank’s net profit more than halved to Rs.505 crore from a 
year ago, the lowest in six years, because of high provisioning towards 
non-performing loans, while Indian Bank’s net profit fell 38% to Rs.306 crore
 for the same reason. Photo: Mint

Live Mint :Krishna Merchant :11 Nov 2013 

The mark-to-market losses the banks had to book in their bond 

portfolios added to the pain, and margins also got squeezed 

owing to volatile money markets

The story of public sector banks’ September-quarter earnings is the same

 across the board: that of worsening asset quality weighing on profitability

. The numbers of Punjab National Bank (PNB) and Indian Bank, which 

reported earnings on Friday, were no different. The mark-to-market 

losses the banks had to book in their bond portfolios added to the pain, 

and margins also got squeezed owing to volatile money markets.

PNB’s net profit more than halved to Rs.505 crore from a year ago, 

the lowest in six years, because of high provisioning towards

 non-performing loans. Indian Bank’s net profit fell 38% to Rs.306

 crore for the same reason.

A worsening economy that is seeing loans turning bad even among

 large and medium-sized companies is hitting banks hard. PNB’s gross

 non-performing assets (NPAs) as a percentage of total advances rose

 to 5.14%, the highest in 13 quarters. Indian Bank’s gross NPAs were 

at 3.76% at the end of September, 35 basis points (bps) higher than

 a quarter ago. One basis point is one-hundredth of a percentage point.

PNB, in particular, was among the hardest hit. Unlike some other public 

sector banks, PNB’s rate of fresh loans slipping into bad loans is worsening.

 Fresh slippages in the September quarter amounted to Rs.5,280 crore,

 compared with Rs.3,271 crore in the three months ended June, mainly 

from the services, industries, construction and chemical products segments. 

The bank also recast loans worth Rs.2,770 crore, the same as in the June quarter.

That’s not all. Loan growth was hit as well. PNB grew its advances 

6.5% in the September quarter over a year ago, while Indian Bank’s

 advances were better at 15%, although it was below the industry

 average of around 17%. In a quarter where domestic money

 market rates shot up owing to the central bank’s defence of the 

rupee, the net interest margins were compressed. PNB reported 

a 5 bps sequential decrease in margins to 3.47% and Indian Bank’s

 net interest margin, or the difference between the cost of deposits

 and the return on deposits, fell 13 bps to 2.69%.

As many other state-run bank managements have done this 

earnings season, the executives at PNB also said the worst may

 be over. However, as this column pointed out last week, with the

 economy yet to get out of its slump, credit growth is falling once

 again after reaching a peak of 18.1% in mid-September.

 With other indicators such as the purchasing manager’s indices

 showing continuing contraction, asset quality problems may not

 abate in the coming quarter as well. Thus, it was not surprising

 that both the shares fell on Friday following the results announcements.

 Given the uncertain economic recovery, the prospects for public sector

 bank shares are bleak.