Public sector banks (PSBs) turned in a collective profit in Q1FY20 — the first time in more than two years — on the back of strong treasury gains. Nonetheless, the aggregate profit of Rs 3,948 crore was well below that of private player HDFC Bank’s Rs 5,568 crore.
Among the clutch of 19 PSBs, four continued to report losses in the June quarter — Syndicate Bank, UCO Bank, Indian Overseas Bank (IOB) and Punjab & Sind Bank. The last time PSBs reported an aggregate profit was in Q4FY17.
Thereafter, the Reserve Bank of India’s (RBI) June, 2017 directive asking banks to refer the largest non-performing assets (NPAs) to the insolvency courts led to a steep climb in their provisioning burden.
That, in turn, took a toll on their profitability. As most banks have now finished setting aside the aging provisions required for their legacy NPAs, they have managed to return to the black with some help from treasury gains arising out of softer bond yields.
State Bank of India (SBI), which reported a profit of Rs 2,312 crore in Q1FY20, said its priority is to keep increasing its pre-provisioning core operating profit.
Talking to mediapersons after the bank’s results, SBI chairman Rajnish Kumar said: “There we have been clearly successful. The pre-provision operating profit is Rs 13,246 crore and that marks a 10% growth from last year. If we remove the income from the resolution of a large account in the same quarter previous year and make an apple-to-apple comparison, there is a growth of 32%.”
SBI’s provisions fell 52% year-on-year (y-o-y) and its non-interest income rose 20%.
Analysts, however, were disappointed with the bank’s core performance and saw it as the result of slippages in the agri segment. “Core PPOP at Rs 11,000 crore missed due to Rs 2,000 crore of NII (net interest income) reversals and higher opex growth due to higher retiral provisioning. High NII reversals were due to seasonally high agri slippages, which should not recur in our view,” analysts at Nomura wrote.
Punjab National Bank (PNB) posted a net profit of Rs 1,019 crore in Q1FY20 against a loss of Rs 940 crore in the same quarter a year ago.
PNB MD and CEO Sunil Mehta said the profit was largely the outcome of a 65% year-on-year reduction in provisions. “The basic reason behind the profit is that the bank has reduced its provision requirement substantially. Last year, the (Nirav Modi) fraud had cost us a lot of provisions. That kind of legacy burden we don’t have this year,” Mehta said.
Since much of the improvement in PSB performance is riding on lower asset-quality pressure and not on purely operational metrics, analysts are taking a dim view of it.
“The management continues to focus on recoveries, sale of non-core assets and conservation of capital. We, however, believe a weak earnings profile, structural operational issues and a diluted franchise render PNB a structurally challenging investment proposition,” analysts at Edelweiss wrote in a recent note.
In other words, a fresh upsurge in slippages or a trend of rising yields in the bond market could easily render PSBs’ gains short-lived.