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Q3 was banking sector's best show in over 6 years, and public sector banks were the heroes 

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Q3 was banking sector's best show in over 6 years, and public sector banks were the heroes 

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Public sector banks reported combined positive net numbers only 11 times in the past 25 quarters, whereas private sector banks reported combined positive net numbers throughout. But now, public sector banks have been reporting a steady rise in profit after tax for seven straight quarters. In Q3, public sector banks reported a stunning 136 percent year-on-year rise in combined net numbers.

Q3 was banking sector's best show in over 6 years, and public sector banks were the heroes 
Amid one of the biggest loan frauds coming to light, there is a piece of news the banking sector can cheer about. In the October to December period of 2021-22 (Q3FY22), the sector reported the best quarterly profits in over six years—twenty-five quarters, to be exact.
And this feat was led by public sector banks. In the past 25 quarters, public sector banks reported combined positive net numbers only 11 times, whereas private sector banks reported combined positive net numbers throughout.
But for the past seven straight quarters, public sector banks have been reporting a steady rise in profit after tax. The last combined net loss (Rs 26,444 crore) posted by pubic sector banks was in Q4FY20.
Turnaround in public sector banks
Net profit / (loss)
PSU banks (Rs cr)
Private banks (Rs cr)
Total (Rs cr)
Q3FY22
                         18,308
                         26,866
               45,174
Q2FY22
                         17,699
                         19,154
               36,854
Q1FY22
                         14,615
                         17,560
               32,175
Q4FY21
                         10,167
                         15,940
               26,107
Q3FY21
                           7,766
                         19,749
               27,515
Q2FY21
                           9,165
                         18,685
               27,850
Q1FY21
                           6,001
                         14,319
               20,320
Q4FY20
                       (26,444)
                           5,477
            (20,967)
Q3FY20
                         (8,474)
                         16,460
                 7,986
Q2FY20
                         (4,186)
                         11,399
                 7,213
Q1FY20
                               123
                         13,298
               13,421
The public sector banks reported a 136 percent year-on-year rise in combined net profits at Rs 18,308 crore in Q3FY22. Quarterly, profits were up by 3.4 percent. Also, none of the public sector banks reported a net loss in Q3FY22.
The turnaround in the public sector lenders' quarter-on-quarter profits was led by UCO Bank, Punjab & Sind Bank, Bank of Maharashtra, and State Bank of India (SBI).
Private banks also performed strongly on account of lower slippages and strong recovery.
The combined net profit of private lenders grew 40 percent quarter-on-quarter and 36 percent year-on-year to Rs 26,866 crore in Q3FY22. Robust growth was reported by RBL Bank, Equitas Small Finance Bank (SFB), IDFC Bank, J&K Bank, CSB Bank, YES Bank, HDFC Bank, and Axis Bank, among others. Only two private sector banks – South Indian Bank and Ujjivan SFB – posted net losses.
The latest numbers indicate that the banking sector's performance in stressed assets is improving.
GNPAs decline
Banks (Rs cr)
Q3FY22
Q3FY21
Q2FY22
YOY
QOQ
PAT
                  45,174
                  27,516
           36,854
                64.2
                     22.6
GNPA
                 757,443
                 743,080
         784,494
                  1.9
                      (3.4)
NNPA
                 219,563
                 174,054
         237,574
                26.1
                      (7.6)
GNPA (%)
                      6.72
                      7.22
              7.31
         (50) bps
            (59) bps
NNPA (%)
                      1.95
                      1.69
              2.21
            26 bps
            (27) bps
In its December Financial Stability Report (FSR), the Reserve Bank noted that banks' gross non-performing asset (GNPA) ratio may rise to 8.1 per cent by September 2022 under the baseline scenario and to 9.5 per cent under a severe stress scenario.
According to the Q3FY22 numbers, the banking sector's GNPA ratio stood at 6.72 percent—down from 7.31 percent in Q2FY22 and 7.22 percent in Q3FY21. In absolute value, GNPAs reduced 3.4 percent quarter-on-quarter to Rs 757,443 crore in Q3FY22. They, however, grew 1.9 percent, year-on-year.
A portion of the credit for the decline in GNPAs goes to public sector banks. Their GNPA ratio dropped from a high of 15.63 percent in FY18 to 8.39 percent in Q3FY22. It was at 9.09 in Q2FY22 and 9.29 percent in Q3FY21. In absolute value, GNPA of public sector banks reduced 3.3 percent quarter-on-quarter and 3.5 percent year-on-year to Rs 593,486 crore in Q3FY22.
Many banks, including City Union Bank, Karnataka Bank, Equitas SFB, South Indian Bank, etc., continue to have low core provision coverage. Fee income was high in Q3FY22, which largely offset net interest margin compression for many lenders.
Asset quality of private lenders also improved marginally quarter-on-quarter. Their GNPA ratio stood at 3.91 percent in Q3FY22—this was down from 4.29 percent in Q2FY22 but slightly higher than 3.49 percent in Q3FY21. Their GNPAs declined 3.9 percent quarter-on-quarter to Rs 163,957 crore in Q3FY22. They, however, grew 27.7 percent year on year.
Stress conditions
The RBI noted in its FSR that banks would have sufficient capital, both at the aggregate and individual levels, even under stress conditions.
Restructured books indicate the possibility of future stress in lenders' balance sheet. Overall, lenders restructured Rs 263,414 crore worth of loans, forming 2.38 percent of the outstanding loan books. The numbers don't include IDBI Bank, City Union Bank, and Dhanlaxmi Bank data as the lenders did not disclose these figures.
The SBI had the highest restructured book, by amount, at Rs 32,895 crore. Lowest restructured book, amount wise, was that of CSB Bank. As a percentage of the loan, the highest restructured book was that of Suryoday SFB at 16.66 percent and the lowest was that of Kotak Mahindra Bank at 0.5 percent.
The RBI has warned in its FSR that emerging signs of stress in micro, small and medium enterprises (MSME) and the microfinance segment call for close monitoring of these portfolios, going forward.
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