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The Indian Banking Sector Report: NPA Shocks Continue As Banks Struggle to Provision Enough


At Capital Mind, we’ve been watching banks carefully. There’s a lot of value out there, but also a lot of information that needs comparison. Here’s a report that tells you a lot of ratios and numbers across the banking system.

P/B And P/E Ratios:

P/B ratio indicates the price to book ratio – or the market cap of the company compared to (Equity plus reserves). P/E or Price to Earnings ratio (market cap divided by net profit) denotes the future earning expectations of the company.
The graph below denotes investors are ready to pay higher price only on in either of two conditions viz. the first being cleaner balance sheet (lesser NPA’s) or the bank should have a larger asset or liability size (Deposits and Credit).
Banks like Kotak, J&K, IndusInd, HDFC, Federal have comparatively high P/E’s due to  cleaner balance sheets. Where as SBI has comparative high P/E due to larger book and controlled NPA’s.
But even some banks with large books are not valued that much. Take an example of Bank of Baroda, which is third largest in terms of  (Deposits + Credits) in India. It gets a low P/E mainly because of its relatively high NPAs and losses in past few quarters.
The other interesting case to look is at IDBI bank. The P/E ratio will be very  (when absolute EPS is taken into consideration), but here the P/B ratio is higher than P/E ratio.
Note: P/B values are as on 19th Sept 2016
Note: P/E value are as on 19th Sept 2016; Some P/E values are negative due to negative trailing EPS.

Revenue And Profit Growth

Most of the banks have marginal increase or de-growth in terms of revenue, except for few banks like Yes, Kotak, Indusind and HDFC, which have a high net interest margin (above 3.4%). As credit growth has slowed, most public sector banks have seen a revenue cut. Banks which are mainly in the retail sector and have lesser exposure towards corporate lending are not taking a hit on their credit growth.
The profits of the public sector banks have also taken a hit, due to higher provisioning (still most of them have not completed their provisioning quota) and more accounts going into NPA. This applies to ICICI and Axis Bank as well.
Interesting Facts:

  • The total revenue of above said 37 banks together is at Rs. 2.59 Trillion and it grew by 4.16% YoY.
  • The total net profit of above said 37 banks together is at Rs 8862 cr. A contraction of 53.20% YoY.
  • SBI and its subsidiaries accounted for 21.73% of all the revenue generated (last year same quarter 20.88%). And in terms of profit, SBI and its subsidiaries accounted for 12.23% of the profits (last year same quarter 21.85%)

Largest And Smallest Banks

Did you realize HDFC Bank was the second largest in terms of deposits?

Deposit And Credit Growth.

Yes Bank, Lakshmi Vilas, Kotak, Indusind, HDFC, DCB and Axis have more than 15% growth in terms of deposits and credits. In most cases, credit growth has been better than deposit growth, as loans are cheaper now and deposits are not worth it! RBI has cut rates by 1.5% in last two years.
Please refer the MCLR post to check the latest MCLR and deposit rates.
Despite this some banks like UCO, Syndicate, IOB, Corporation Bank, Central Bank of India, Canara Bank, BoI, BoB have cut down on credit. The banks have been more cautious and cutting on lending, they want to clean their books before getting into fresh lending.
Note: Deposits and Credits were not available for following Banks – Dhanlaxmi Bank, SBBJ, SBT
Credit growth also slows as you recognize NPAs and write them off.
Interesting Facts:

  • The total deposits taken by the above 34 banks (excluding Dhanlaxmi, SBBJ, SBT) is Rs 89.04 Trillion. The deposits grew by 6.57% YoY.
  • The total credit given out by the above 34 banks (excluding Dhanlaxmi, SBBJ, SBT) is Rs 69.70 Trillion. The credit growth stood at 5.27% YoY.
  • For the current quarter, SBI and SBM together accounted for 20.84% (Last year same quarter 20.13%) of total deposits undertaken. And in terms of credit, both accounted for 21.11% (Last year same quarter 20.12%)

Net Interest Margin

Net interest margin is just interest earned (loans) minus interest paid (deposits). It typically boils down to their efficiency in revenue; Higher the net interest margin, higher the revenue generation. The industry average lies between 2-2.6%.
Think of this as a “management fee” for your deposits. You give a bank money. It lends it onward. It gets 10% but pays you 7%. You have some guarantees etc and don’t have to take risks if there are defaults, but the effective fee you pay is of the order of 3%.
Kotak, HDFC, DCB, CUB have a very high net interest margin (above 4%) and have been doing outstandingly well in this parameter. And in the red are United Bank of India, UCO Bank and IOB (all below 2%). This happens when credit growth shrinks too much and deposits increase.
Note: Net Interest Margin figure was not available for the following banks – Dhanlaxmi Bank, SBBJ, SBT

Gross NPA % and Net NPA %

An account is considered NPA (a Non Performing Asset) if no payment has been made towards loan servicing for more than 90 days. Gross/Net NPA % is percentage of Gross/Net NPA towards the gross advances. NPAs indicate the quality of loan book. The higher NPA is a double whammy for the bank, as they do not get income on loans classified under NPA (lesser revenue) and they need to set aside provisions (lower profits) for the NPA identified.
Banks which have very minimal exposure to corporate loans (high retail loans), have the least NPAs. Yes Bank, IndusInd, HDFC, Kotak, Axis, Federal, Lakshmi Vilas, DCB and CUB all have gross NPA’s below 3%.
ICICI Bank and SBI despite large credit lending have managed to keep NPAs in sustainable limits. It might be because of the high volume of credit lending they undertake every quarter which offsets the NPA growth.
IOB, UCO Bank, United Bank of India, PNB, Central Bank of India and Bank of India have alarmingly high level (>13%) of Gross NPA%. IOB (gross NPA at 20.48%) will not be able to sustain if it goes above its current level, unless it brings in more cash infusion.

NPA Slippages:

Gross NPA growth and Net NPA growth are indicative of further slippages. Higher slippages needs to be offset with higher provisioning, which again is going to take a toll on bank profits. But after four quarters (after the RBI’s clean up drive) of NPA recognition, do the slippages really need to increase now? Well since the banks have time till March 2017, they have another three quarters to go. But ideally by next quarter most of the NPA’s have to be identified and the provisioning might take till March 2017.
The NPA growth has been below 15% (QoQ basis) for most of the banks. But their have been exceptional cases. SBT, Andhra Bank and Axis Bank have seen a drastic increase in NPA recognition. Even SBBJ, J&K Bank, bank of Maharashtra, SBM, Oriental bank of Commerce, DCB and Allahabad Bank are having higher slippages.
SBI, South Indian bank, PNB, Indian Bank, Federal bank, Dhanlaxmi bank, Canara, BoI and BoB have reported NPA slippages well within 8%, indicative that, they are comparatively more stable with NPA recognition and might not add higher NPA’s in coming months.
Interesting Facts:

  • The Gross NPA of the above 37 banks together stands at Rs 6.24 Trillion, it grew over 9.65% from the previous quarter.
  • The Net NPA of the above 37 banks together stands at Rs 3.66 Trillion, it grew over 10.15% from previous quarter.

Provision Coverage Ratio And Provision Growth

Provision Coverage Ratio aka PCR indicates the percentage of provisions done for the outstanding NPAs. The RBI prescription (though not mandated) is at 70%, but many banks are struggling to reach this target. Higher provisioning takes a hit at the profits, and hurts capital – a very high provisioning will hit their capital hard and thus reduce their capital adequacy ratio (CAR).
Most of the banks PCR lies in the range of 45% to 55%, indicating the banks aren’t anywhere close. Rather than provisioning for the NPAs, they bet on a recovery (the rest they can write off as bad debt, rather than provisioning for the whole NPA).
Provision requirements are like this: 15% where no money has come from the borrower in 180 days or lower. More than 180 days, you have to provision 40% of the loan, and for more than 2 years, it’s 100%.
The idea is that the bank may have collateral that it can exercise to get back some money. But banks think they have so much collateral that they won’t even put 70% of the required provisions (which are in turn a low percentage of the loan) thinking that they will recover money somehow. This habit has to change – and banks need to get to PCRs of 70%.
Some banks which have lower NPAs and have good profits are comfortable with higher provisioning, like DCB (75.25%), Dhanlaxmi (75.54%), Federal (72.09%), Axis (69%). These banks have already reached their provision quota, they will have an upper hand in the coming quarter, as there be very minimal provisioning and further their might be cases of write back.
(If you lend Rs. 100,000 and provision Rs. 40,000, you are effectively at 100% PCR on this loan, and you’ve decided that you can recover only 60,000. In a few months you might recover Rs. 80,000 from the collateral, and you will “write back” Rs. 20,000 as excess provisioning since you didn’t lose as much as you thought you would)
The under performers (less than 50%) are South Indian Bank (42.55%), Allahabad Bank (46.03%), Indian Overseas Bank (47.61%), Vijaya Bank (48.55%), Oriental bank of Commerce (49.33%). These banks have still lot of ground to cover and need more provisioning in coming quarters.
In terms of provision growth SBT (151.37%), SBM (293.96%) and SBBJ (207.46%) have seen a huge spike in terms provisioning (even the NPA’s have seen increase). They might have been waiting for the merger thing to finalize. But its never too late to make things right.
The other interesting thing to look at is the so called “Safe Banks” like HDFC, Axis and Lakshmi Vilas Bank, which are having the lowest NPA %, have shown a higher degree of provisioning. The banks might be provisioning either to reach the PCR target or taking a cautious approach for the future NPA’s about to come.
Note: PCR was not available for the following Banks – Bank of Maharastra, HDFC Bank, Karnataka Bank, Kotak Bank, Lakshmi Vilas Bank
Interesting Facts:

  • Rs 42,477 cr. was the total provisioning done by the above 37 banks for the reported quarter. The provisioning declined by 44.60% compared to last quarter.
  • For the reported quarter, the total provisions of the above said 37 banks accounted for 16.37% of their revenue. For the last quarter it was 30.78%.

Capital Adequacy Ratio

Capital Adequacy ratio (CAR) is the risk weighted capital the banks need to maintain. The current RBI mandate puts it at 9.6%. If the banks CAR is below that level, then they have too little capital to support their operation – and RBI could enforce restrictions on it.
(RBI had done so with United Bank of India, stopping it from lending further, until the government managed a cash infusion and let the bank get back in shape – a process still far from completion)
For CAR, anything above 14% is outstanding (a bank can sustain for another couple of quarters even with higher provisioning). Kotak, ICICI, Indusind, Yes, HDFC, City Union, SBI, Axis, BoB fall in this safe category.
Dhanlaxmi Bank is way out of league with a CAR of 7.44%. This has been the case for last one year (below 9.6%), and we don’t know how the bank has been surviving for last one year with such a low CAR!
Indian Overseas Bank also is in serious trouble until it infuses some capital. It is below the prescribed 9.6%. It needs to raise capital, before things start turning against it. The other banks in danger zone (below 10.5%) are United bank of India, UCO bank, Central bank of India, Corporation Bank.

“The” Performers


The Curious Cases

  • SBT, SBBJ and SBM have shown a sudden spike in terms of NPA and provisioning; whether it was to safeguard themselves for the merger or they were little late in recognizing NPAs and provisioning is unknown.
  • Dhanlaxmi Bank which has an outstanding PCR of 75% is bleeding in terms of capital ratios. It has achieved well over the target of 70% (when most banks are below 60%) at the cost of its CAR – meaning, it has provisioned more than the RBI demands, but then the capital remaining has fallen below RBI standards. The bank has recently raised 84 cr . But was this move necessary? This question the bank needs to answer.
  • Indian Overseas Bank has been a disaster, The bank has very high gross NPA of 20.48% i.e IOB is unable to recover Rs 20 for every Rs 100 of loans given!. Its CAR has plunged below the Lakshman Rekha (of 9.6%) at 9.47%. Its Net interest margin is at 1.87%, PCR at 47.61%. With so many NPAs on the books, was the bank sleeping till now? UCO Bank too is in similar shape.
  • Banks which have very low NPA% like HDFC, Indusind etc. have shown a higher provisioning.

Our View

The NPA issue has been running havoc in banking sector, and some banks like IOB have taken too much of a hit – they are tottering and the only reason they aren’t insolvent is some of these banks are government owned.
Banks like HDFC Bank haven’t seen much damage as the issue seems to be more industrial and less about retail.  Bank PCRs, though, are below 60% and that needs to change fast.
There are tailwinds. With the steel industry picking up, the govt’s Rs 25000 Cr cash infusion into public sector banks and govt’s initiative to clear construction companies arbitration claims to help them pay their debt has temporarily bought relief to the banks.
But banking as a sector sees new competition from newer banks – both the small banks (Equitas etc) and the payment banks (Paytm, Post office etc) will start eating the deposit pie. The lending pie seems to be sitting with NBFCs which are seeing roaring business as banks refuse to lend. The RBI may try and cut rates, but banks which simply do not lend will not see any relief – they will need to recognize their bad loans, write them off, raise equity and then move forward.
Meanwhile, the RBI is making it very easy for consumers to bank with any one bank and use the banking facilities (ATM, Online payments, cards etc) with common infrastructure. It doesn’t really matter which bank you are with – the central infrastructure for banking seems to have become common – and with TReDS and BBPS, even bill payments and working capital loans (factoring) will ensure that more banking goes into common infra. Paying a high premium for a bank may not be a wise strategy going forward. In fact, it may be better to bet on a small player taking advantage and eating a big part of the larger players’ pie.
We hope this report was informative. All data is from public sources. If you notice any errors, please do comment on this post.


Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.


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