The good, the bad of banking's Q3 and what it tells us

MUMBAI: Fortunes of Indian banks swung widely with infrastructure-focused lenders continuing to reel under bad loans and those with little or no exposure to builders of road or power plants continuing to post robust earnings.

Axis Bank, the third largest private sector lender said its December quarter earnings fell 73% after it provided Rs 3,796 crore for bad loans, while the smaller Yes Bank saw earnings rise 31% boosted by lending to mid-sized companies.

Both the banks made huge gains in treasury in the Oct-Dec quarter as bond yields fell due to a surge in deposits following the demonetisation of Rs 500 and Rs 1,000 currency notes.

Axis Bank reported a net profit of Rs 580 crore against Rs 2,175 crore in the same period last year amid falling advances and rising non-performing loans. The bank's gross NPA ratio expanded to 5.22% in the quarter under review while its fresh slippages fell to Rs 4,560 crore versus Rs 8,772 crore sequentially.


“The bank's slippages have reduced from the peak and they continue to be driven by the watchlist.We expect that FY17 will be the peak of slippages and credit cost in this credit cycle,“ said Jairam Sridharan, CFO, Axis Bank.

The bank's watchlist accounts reduced 20% to Rs 1,1091 crore, almost 2.8% of the banks customer assets.Even while the overall slippages fell 48%, what was worrisome is the pace of slippages from the bank's non-watchlist book. Net slippages outside the watchlist increased to Rs 1,631 crore against Rs 411, sequentially. Bulk of these slippages came from the bank's corporate book.

“Slippages outside the watchlist over the last two quarters have been a bit higher than what we had anticipated,“ Sridharan said. “Slippages have come from problematic sectors which are common with our watchlist pool as well.“

For Yes Bank, net profit increased to Rs 883 crore in the quarter as advances grew a robust 39% and fee income increased 34% to Rs 998 crore. Profits were also helped by an expansion in the bank's net interest margin ( NIM) which improved to 3.5% from 3.4% last year.

NIM is the difference between the yield a bank earns on loans and that it pays on deposits, and is considered a key matrix in judging bank profitability. NIM improved because the bank's low cost current and savings account deposits rose to 33.3% of total loans compared to 26.6% a year earlier.

This CASA increase was led by the deposit of high value currency notes into the bank's accounts, the bank's Chief Executive Of ficer Rana Kapoor said.

“We are seeing a tremendous amount of momentum in CASA deposits. 2% of the CASA growth was because of the demonetisation. We expect these deposits to be sticky, which will help us to be competitive. We expect to meet our target of 40% CASA deposits one and a half years earlier than our so far set target of March 2020,“ Kapoor said.

Yes Bank garnered Rs 8,068 crore of the demonetised Rs 500 and Rs 1,000 notes in November and December.

“We saw credit growth among mid-sized companies but we also saw some stress in sectors like micro finance and consumer loans, which we were cautious on during the quarter,“ Kapoor said.

The CEO said he expects normalcy to return in the first quarter of next fiscal led as credit demand bounces back from industries like auto, two wheelers and commercial equipment.