Asset quality to remain under pressure for banking sector, says Icra

With the slowdown in the economy coupled with stretched working capital cycles, gross non-performing assets (NPA) of 26 government banks are likely to be around 5% levels by the current fiscal-end, said a study by rating agency, Icra. The gross NPA percentage for the banking system as a whole is seen up from the 4.1% at December end to 4.2-4.4% by March 31, it said. Public sector banks'(PSBs) high levels of net NPAs of around 2.8% and fresh slippages of over 3% are also likely to keep their core profitability under pressure, while at the same time, the unamortised mark-to-market (MTM) losses could prove an additional drag on the overall profits during the fourth quarter, Icra said. The study comprising 26 PSBs and 16 private sector banks during October to December 2013 paints a gloomy picture for the banking sector. It said due to lower net interest margins (NIMs), lower non-interest income, higher credit provisions and depreciation on fixed income investments, the PSBs' profit after tax for FY2014 are likely to be 30-40% lower than the last fiscal levels. This is likely to translate into a drop in return on equity to 7-8% during the current fiscal from 13.2% during FY2013 (8.6% in nine months of this fiscal) for PSBs. However, an increase in the base rate by PSBs could offset the pressure on their profitability to an extent. The 42 banks collectively accounted for more than 90% of the total credit portfolio and deposits of all commercial banks in India, as of December 2013. PSBs reported single-digit return on equity for the second consecutive quarter in current fiscal. Going forward, the possibility of improvement in the PSBs' profitability in the short term appears limited, given their limited ability to increase lending rates, the tight monetary stance prevailing, asset quality pressures, higher levels of inflation, and the impending wage revision. In addition, while the profitability of the PSBs is likely to remain low, there is a little chance of them being able to conserve capital via dividend deferrals (19 of the 26 PSBs have already announced interim dividends). Thus, internal capital generation (6-7%) is likely to fall short of even the expected low balance-sheet growth, and this, along with low investor appetite for PSBs, would only increase their dependence on the government for the raising of equity capital. Source  :  http://www.dnaindia.com/money/report-asset-quality-to-remain-under-pressure-for-banking-sector-says-icra-1967388