Companies & Sectors
Declining NIM, rising credit costs, and MTM provisions to hit banks hard in FY14

According to ICRA, a weak macro environment, large rupee depreciation, vulnerability of a large number of infrastructure projects and the rising yields will have significant bearing on the earnings and asset quality of banks in India in FY14

Ratings agency ICRA has said that declining net interest margins (NIMs) rising credit costs and mark-to-market (MTM) provisions would affect banks in India during FY2014. "A weak macro environment, large rupee depreciation, vulnerability of a large number of infrastructure projects and the rising yields will have significant bearing on the earnings and asset quality of the banks," ICRA said in a research report.

 

According to ICRA's estimates, Indian banks (private and public sector banks) were staring at a Rs25,000-Rs30,000 crore MTM losses' on their fixed income investment portfolio in Q2 FY14 as 10-year G-sec yields hardened from 7.45% as on June 2013 to about 9.2% by 19 August 2013. The hardening followed the Reserve Bank of India (RBI's) measures to curb volatility in the foreign exchange rates.

 

However, RBI released certain relaxation on 20 August 2013 which provides banks the option to reduce the size of the AFS/HFT book, modified duration and also to amortise provision for losses on AFS/HFT book over the next three quarters of FY14. These relaxations are expected to reduce provision for MTM losses of the banks from the earlier estimates of Rs25,000-Rs30,000 crore in second quarter of 2014 to Rs3,000-Rs5,500 crore. Although losses for the balance year (July 2013-March 2014) are estimated to be higher at Rs9000 to Rs17,000 crore, ICRA said.

 

The ratings agency said, “RBI action may also lead to an increase in the cost of deposits. While increase in the cost of deposits would be visible faster for private sector banks, which are more reliant on certificate of deposits (CDs) / large deposits, PSBs are unlikely to remain insulated from higher costs over next three to nine months. As per ICRA estimates, reliance on large deposits (more than Rs1 crore deposits, which are typically shorter tenure) is as high as 50% for the Indian Banking system.”

 

ICRA has analysed the performance of 20 Nationalised Banks, six banks in the State Bank Group (SBI group) - collectively referred to as public sector banks (PSBs) - and 15 banks in the private sector (private banks) during the period April 2013 to June 2013 (Q1 FY14) and the outlook for 2013-14. These 41 banks collectively account for around 90% of the total credit portfolio and deposits of all commercial banks in India as of June 2013.

 

ICRA expect the gross non-performing assets (NPAs) of PSBs to rise to 4.8%-5% as on March 2014 from 4.2% as on June 2013. As PSBs NPAs have a larger bearing on the banking system NPAs, gross NPA percentage for banking system could rise further to 4.2-4.4% as on March 2014 from 3.8% as on June 2013, it said.

 

 

 

FY12

Q1, 

FY13

Q2,

FY13

Q3,

FY13

Q4,

FY13

Q1, 

FY14

Fresh NPA generation rate (annualised)

2.8%

2.7%

3.6%

3.5%

2.9%

4.2%

Recovery & upgrades ass % of opening gross NPAs (annualised)

43.0%

22.4%

27.1%

37.2%

42.8%

27.7%

Write-offs as % of opening gross NPAs (annualised)

20.0%

14.1%

15.5%

10.5%

26.6%

11.8%

Gross NPA %

3.0%

3.3%

3.8%

3.9%

3.6%

4.2%

Net NPA %

1.5%

1.8%

2.1%

2.2%

2.0%

2.5%

Provisioning cover[1]

50.6%

48.2%

45.8%

45.3%

45.3%

42.2%

Net NPA/ Net worth

17.9%

20.0%

22.8%

23.9%

24.0%

28.1%

Standard Restructured Advances

5.7%

6.7%

7.3%

7.4%

6.2%

6.4%

Source: ICRA

 

The ratings agency said it expects earnings of private sector banks for 2013-14 to be lower than Q1 due to an expected decline in NIM (despite a possible 25-50 basis points hike in base rate) as well as significant MTM losses due to rising yields. However, the core profitability of private sector banks was high (2.1%-2.3%) to absorb these negative impacts, therefore private sector banks may still be able to report a double digit return on equity for 2013-14. Nevertheless, for private sector banks with large infrastructure exposures, slippages in the large accounts could increase the credit provisions and dilute the core earnings over the medium term, ICRA said.

 

 

 

FY2012

Q1, 

FY13

Q2,

FY13

Q3,

FY13

Q4,

FY13

Q1, 

FY14

Gross NPA %

2.0%

2.0%

2.0%

1.9%

1.9%

2.0%

Net NPA %

0.5%

0.5%

0.5%

0.5%

0.5%

0.6%

Provisioning cover[2]

77.2%

76.2%

73.7%

72.9%

72.5%

69.6%

Net NPA/ Net worth

2.7%

2.9%

3.2%

3.2%

3.1%

3.5%

 

PSBs core earnings are extremely low at around 0.7%, therefore, their ability to withstand any further pressure to absorb higher credit costs, increased liabilities due to wage revisions or wider MTM losses due to rising yields is extremely limited. As per ICRA estimates, return on net worth for PSBs could drop to single digit in 2013-14 which along with low valuations could necessitate PSBs to rely primarily on the Government of India (GoI) to shore up capital to comply with more stringent Basel III norms or for growth. Asset quality and earning pressures could also make banks more risk averse, which could further make availability of credit scarce even if the credit demand were to pick up, the ratings agency concluded.

 

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