PSU banks to continue to lag private peers
Mumbai:
Profits of public banks will continue to lag private counterparts in
the quarter ended 31 March, stressed by higher bad debt, forcing them to
keep aside more money to provide for them, thus directly impacting
profits, analysts said.
Private banks such as Yes Bank Ltd, IndusInd Bank Ltd, HDFC Bank Ltd, ICICI Bank Ltd and Axis Bank Ltd
have set the pace for profit growth by broadly beating market
expectations, riding on loan growth higher than the system average and
an increase in non-interest income.
These
banks have been successful in stepping-up fee income and loan demand
from individuals when credit demand from companies has sagged. Bad debt
has also been kept in check, which meant a lower burden of provisioning.
However, analysts are not too enthusiastic about nationalized banks that will announce their results starting with IDBI Bank Ltd
next week. State-owned banks have “continuously lost profit market
share” to their private sector counterparts over the last few years, Angel Broking Pvt. Ltd said in a report earlier this month.
“During
the fourth quarter of fiscal 2014 as well, we expect earnings
divergence amongst our coverage banking stocks to continue, as we
anticipate new private banks to report a healthy earnings growth of
18.7% year-on-year, while PSU banks under their coverage are expected to
report weak performance with earnings de-growth of 12% year-on-year,”
the brokerage said in its results preview for the banking sector.
Angel
Broking expects government-run banks to register a net interest income
growth of 15.1% year-on-year, but non-interest income will decline 2.2%.
Net interest income is the revenue generated from the spread between
interest paid out on deposits and interest earned on loans.
“Additionally, growth in operating expenses for PSU banks is expected to
be higher at 15.5% year-on-year, as against 10.1% year-on-year for new
private banks,” Angel Broking said.
Results
announced by private banks last week showed a rise in profit because of
an increase in both interest as well as non-interest income.
IndusInd Bank,
the smallest among the lot, for example, reported a higher than
estimated 29% rise in net profit in the March quarter, driven by an
increase in both interest and non-interest income. Other income or
revenue earned through fees rose at a much quicker 42% compared with a
18% rise in net interest income (NII).
ICICI Bank,
the largest among the private sector banks, also reported
higher-than-estimated profit because of a 35% increase in non-interest
income, mainly fees earned from banking activities and through selling
investment products such as mutual funds (MFs) and insurance. NII
increased 15% led by demand for loans from individuals, the bank said.
Public
sector banks, unlike their private peers, are not known for their
expertise in selling investment products such as MFs and insurance or
earning fees through advisory services.
The main reason public banks will underperform their private sector peers is non-performing assets (NPAs), according to Rakesh Shinde, an analyst who tracks banks at Mumbai-based brokerage Bonanza Portfolio Ltd.
“Asset
quality of public sector banks is expected to deteriorate by at least
5-10 basis points (bps) quarter-on-quarter, and though there has been
some improvement due to stringent regulations and sale of bad loans to
asset reconstruction companies, I am still not bullish about these
banks,” Shinde said. A basis point is one-hundredth of a percentage
point.
In a banking sector preview note on 12 April, HDFC Securities Ltd
said profits of state-run banks may weaken because they have to also
need to set aside money for previously unprovided mark-to-market losses
and annuity benefits for employees.
“Expansion
in multiples for public banks would continue to be a challenging one as
the risks, especially on credit costs led by elevated slippages, are
high. We recommend cautious stance on PSU banks as a segment, given the
challenges they face in terms of low capital adequacy and core
profitability (and) higher competitive intensity not only loss of
deposits and credit market share, but also of profitability as current
credit cycle evidently highlights adverse asset selection on part of
PSUs and superior selection by private banks,” HDFC Securities said.
The
divergence between earnings of public sector and private banks will
continue because “there is still some pain left” in PSU banks, said Anuj Anandwala, an analyst at Parag Parikh Financial Advisory Services Ltd.
“The
continuing additions in NPAs will lead to higher provisioning, which
will hit profits,” Anandwala said. “Some banks, for example, which are
not well-diversified will be hit more because of which we are not keen
on public sector banks.”
Despite
the anticipated weakness in earnings in the March quarter, shares of
state-owned banks have outperformed the broader markets. The 12-share
PSU bank index on the National Stock Exchange has risen 16.47% since
January, more than double the 7.59% rise in the Nifty index, as
investors bought these stocks expecting a pickup in the economy and an
easing of the bad loan buildup in banking after a new government takes
charge in New Delhi in May.
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