Is the sun rising for public sector banks?

A year-and-a-half ago, the Reserve Bank of India’s (RBI) asset quality review revealed the ugly underbelly of public sector lenders and showed private sector banks have been more prudent and smart.

Six quarters later, the three-monthly results show private lenders also had an ugly underbelly; they just didn’t expose it.

Private sector banks on an aggregate basis saw their bad loan stock rise 10% on both gross and net basis. Their public sector counterparts reported less than a 1% rise. To be fair, some private sector lenders were better off than everyone and some public sector lenders were the worst performers.

On an aggregate basis, private sector lenders showed just 3% growth in net interest income, the core income a bank earns by giving out loans. Public sector banks (PSBs) reported 8% growth. PSBs are indeed getting their act together as they reported a 14.9% increase in non-interest income as well. Private sector banks could be losing their edge soon as non-interest income grew just 7%.

All this contributed to a 2.2% shrinkage in operating profit for private banks while PSBs reported an impressive 24% growth.

Does this mean PSBs have begun behaving while private banks have been finally caught postponing troubles? The answer is a clear no.

Much of the operating profit growth in PSBs has been from one-time trading gains. This is like a parachute that isn’t available all the time. Despite the surge in bad loans, private sector lenders still account for only 12% of the bad loan stockpile. That means provisioning requirements for PSBs will outstrip that of private sector counterparts in the coming quarters. This improves the profitability prospects of private banks.

For the September quarter though, provisions surged for both. Provisions of private banks rose 34% but even PSBs reported a 46% surge. Analysts have begun rerating public sector lenders partly because of the anticipated better performance and partly owing to the government’s plan to infuse much needed capital into them.

Source :- Livemint