NPAs still a hurdle for BoI; rise in NIM to help CanBank

Non-performing assets (NPAs) continue to plague the performance of Bank of India (BoI) during the December 2009 quarter. Gross NPA formed 2.67% of gross advances at the end of December ‘09 compared with 1.63% a year ago. Rising bad assets have made it necessary for the bank to provide for more. As a result, provisions and contingencies more than doubled causing net profit to skid by over 50% year-on-year.

Higher NPAs have impacted even the net interest margin (NIM) of the bank since there is no interest earned on bad assets. The bank reported 2.6% NIM for the December ‘09 quarter, which was just 3 basis points (bps) up compared to the previous quarter.

The improvement and absolute NIM appear to be muted if compared to others. For instance, its competitor Bank of Baroda reported a 50-bps improvement, as its NIM stood at 3.4% in the December ‘09 quarter.

The only sigh of relief comes from the fact that BoI has improved the coverage of NPA from 59% in the second quarter to almost 70% in the third quarter. This shows that the bank has adequate provisions for bad assets, as the Reserve Bank of India (RBI) had earlier indicated that banks should maintain a minimum provision coverage of 70% by September 2010.

The bank’s results deviated from the results of public sector rivals even on other counts. For instance, its core non-interest income fell by 7.9% on YoY basis in the December ‘09 quarter, while
other banks have reported a growth of 15-20%.

While provisions spoiled the party for BoI, it led to high profit growth for Canara Bank. The bank’s net interest income rose by just 19% YoY. Still, it managed to grow its profit by 50% due to more than 50% fall in provisions and contingencies.

Despite the fall, the bank maintains a 74% provision coverage ratio. Much like BoI, Canara Bank, too, reported muted improvement in NIM. Its NIM improved by only 4 bps in the December ‘09 quarter. While the growth in aggregate credit offtake was 11% in the December ‘09 quarter, BoI and Canara Bank reported 15.3% and 14.3% growth, respectively, in advances.

However, even on this count, their performance is shy of the growth shown by other PSU banks like Punjab National Bank and Bank of Baroda, which could grow their loan books by more than 20%.

It seems that BoI will take some time to arrest the rise in NPAs, and till then, it is unlikely that the bank will post a profit growth. On the other hand, Canara Bank is expected to post a profit growth on the back of continued improvement in NIM and adequate asset quality.