Abundant Caution: PSU banks make chunky provisions for a rainy day

Apprehensive of loan losses due to the disruption to the economy, public-sector banks (PSBs) provided more aggressively in Q2FY21 than their private-sector peers. While 11 PSBs together set aside 72% of their operating profits for the quarter, a clutch of 20 private banks put away 43.5%, according to data from Capitaline. Most PSBs reported a fall in provisions on a year-on-year (y-o-y) basis for the September quarter.

Despite little clarity on asset quality, analysts are by and large satisfied with the kind of provisioning. “There are some grey areas, but banks have made provisions and investors will be willing to forgive them,” an analyst with a foreign brokerage said.

Credit Suisse wrote that adjusting for the Supreme Court order, bad loans across banks would have remained largely stable, adding “…however, we do expect to see slippages rise in H2. Banks, however, over the past three quarters have raised provisioning levels, with NPL cover at 75-85% and buffer provisions on standard assets at 1-2% of loans”. The brokerage expects credit costs to be closer to normalised levels by FY22.

Union Bank of India (UBI) is among those that provided more than the average. Axis Bank has been circumspect, setting aside over 66% of its operating profit as provisions while HDFC Bank and ICICI Bank have provided 27% and 36.3%, respectively, as a share of their operating profits.

Axis Bank downgraded some accounts into the BB and below rated pool and made associated provisions of Rs 3,143 crore. Chief executive Amitabh Chaudhry said the quantum of provisioning was determined by internal risk models. “We want to be ahead of the curve in comparison to the industry, and our actions this quarter reflect the same,” he said.

UBI set aside Rs 4,144 crore against an operating profit of Rs 4,735 crore. MD & CEO Rajkiran Rai G said the bank has another Rs 150 crore of provision against probable interest reversal on those masked slippages. “So, that way we have sufficiently cushioned ourselves for the kind of slippages which are likely to happen,” he said, adding that credit costs could ease substantially by FY22. “If it (Covid-related stress) is according to our estimates, then in the next year the credit cost, according to me, can be something between 1.5-2.2%,” Rai said.

HDFC Bank said as on September 30, 2020, total provisions comprising specific, floating, contingent, general provisions were 195% of reported gross non-performing loans or 154% of pro forma gross non-performing loans.

ICICI said it was seeing a normalisation of market trends and did not feel the need to utilise past provisions. Sandeep Bakhshi, MD & CEO, ICICI Bank, told analysts, “We are confident that the Covid-19 provisions we have already made will completely cushion the balance sheet from potential credit losses which may arise due to the pandemic. We expect a normalisation of credit costs in fiscal 2022 based on our current expectations of economic activity and portfolio trends.”