Sector review: Banking on strong credit growth in FY15

There is nothing to cheer about the banking sector's performance during the quarter ended 30 June 2014 (Q1FY15). Private banks, whose net revenue rose by 11.70 per cent, did well and helped take the sector's growth to 7.47 per cent.

Public sector banks (PSB), despite strong revenue growth from Stata Bank of India, reported sub six per cent growth in revenue.

While net profit of the private banks grew 14.6 per cent, it declined by 3.45 per cent for public sector banks. The sector's net profit grew 3.15 per cent. Poor growth is attributed to a rise in operating cost including cost of deposits, which grew much faster than the rise in interest income.

Interest cost rose 13.16 per cent while interest income was up 12.19 per cent.

The poor state of financial market in FY14 was reflected in the paltry rise of other income by 1.14 per cent for the sector - a 7.16 per cent increase for private banks and a 1.10 per cent decline for public sector banks.

However provision for bad loans declined by 8.65 per cent for the sector and over twice as much (17.37) per cent for private banks.

The banking sector is now banking on results of the mandate for a strong, stable government.

FY14 was impacted by increasing interest rate scenario, slowdown in credit growth, tightening of liquidity and persistent asset quality issues. But with a stable government in place industrial capex is expected to see a modest pick up, which in turn will support credit growth.

The positive highlights according to a banking analyst at Edelweiss Research have been a potential bottoming out of stress cycles and continuation of growth from the retail segment. Asset quality for a few public sector banks seem to have stabilised and the pipeline for restructuring seems to be thinning.

On the negative side, fee income witnessed some pressure across the board. Broad-based asset quality though witnessed some improvement, but slippages from the restructured pool remains a key monitorable. Profitability was impacted by higher provisions for unhedged forex exposure and change in depreciation policy.

Kotak Securities research analysts say Q1FY15 continued to see high slippages from restructured loans; most of them being from the SME and mid-corporate sectors like iron and steel and engineering.

The performance on the textile front appears to be satisfactory with lower slippages though recovery is yet to reflect despite a huge improvement in competitiveness.

Feedback from a few bankers indicates that the peak stress period is probably behind, especially as industries preferred to cut capacity aggressively to respond to the sharp slowdown and a substantial fall in capacity utilisation.

Quarterly growth rate of banking sector %
Net revenue
Net profit
 
Private
Public
All banks
Private
Public
All banks
Q2FY14
14.41
5.15
7.60
18.73
-46.60
-24.70
Q3FY14
11.86
9.69
10.37
13.05
-45.11
-22.82
Q4FY14
10.84
13.29
12.51
11.26
-6.73
0.39
Q1FY15
11.70
5.87
7.47
14.62
-3.45
3.15

Data source: Capitaline