BANKING SECTOR PERFORMANCE STUDY FY14

Banking

Our study covers 39 banks 26 Public Sector Banks & 13 Private Sector Banks.
Foreword
The growth in the Indian economy continued to be moderate in FY14 as reflected by the advance
estimates of GDP growth of 4.9% marginally higher than the 4.5% of FY13. Indias Index of Industrial
Production contracted by 0.1% in FY14 vis--vis a weak growth of 1.1% in FY13 reflecting a decline in the
countrys economic activity. The overall decline in the countrys industrial sector can be attributed to
the contraction in output in mining (-0.8%) and manufacturing (-0.8%) sub-sectors. Capital and

July 25, 2014

consumer goods segment, both witnessed a decline of 3.7% and 2.6%, respectively.
During FY14, the interest rates remained at an elevated level especially post July 2013, when the
Reserve Bank of India (RBI) recalibrated Marginal Standing Facility rate at 300 bps above repo rate at
10.25% to curb the volatility in the exchange rate. This resulted in sudden spike in market interest rates
and market participants incurred a Mark to Market (MTM) loss on their positions. Further to manage
inflationary pressures, RBI raised the repo rate thrice since September 2013 from 7.25% to 8.00%.
Against this macroeconomic backdrop, the banking sector was severely impacted with low credit
demand, pressure on asset quality which led to decline in income and increase in provisions which
ultimately resulted in impact on profitability. There was also an increase in the restructured assets in the
banking book in sectors which got impacted severely in this economic slowdown.
Asset quality continued to be a cause of concern
Asset quality problems of the banking sector got accentuated in FY14 which took a toll on the overall
health of the banking sector. The Gross NPAs of the banks under study showed an increase of 35.5% (yo-y) in FY14 vis--vis credit growth of 14.5% (y-o-y) during the same period. The Gross NPAs of the
Public Sector Banks (PSBs) saw an increase of 38.2% while that of the private sector banks was
comparatively lower at 13.6%.
Overall Gross NPA ratio has risen from 3.26% as on March 31, 2013 to 3.85% as on March 31, 2014. On
comparing the asset quality of PSBs vis--vis private sector banks, it can be observed that PSBs have
witnessed higher deterioration in asset quality than their private sector peers. The Gross NPA ratio for
PSBs stood at 4.33% (March 2013: 3.59%) as compared to 1.82% (March 2013: 1.86%) for private sector
banks as on March 31, 2014.

Banking

Overall
31.03.12

Public Sector Banks

Private Sector Banks

31.03.13

31.03.14

31.03.12

31.03.13

31.03.14

31.03.12

31.03.13

31.03.14

Gross NPA Ratio (%)

2.79

3.26

3.85

2.98

3.59

4.33

1.96

1.86

Net NPA Ratio (%)

Net NPA / Net
Worth (%)
Rest. Advances /
Advances (%)

1.04

1.71

2.16

1.18

2.00

2.53

0.36

0.36

1.82
0.62

13.04

16.39

21.19

17.54

22.39

29.21

2.70

2.97

3.78

5.38

6.03

6.16

6.24

7.05

7.06

2.02

1.71

2.48

In addition to higher NPAs, PSBs also had a large amount of restructured advances which stood at 7.06% of
advances (March, 2013: 7.05%) as on March 31, 2014. The restructured advances are accounts which have
seen stress and there is a higher probability of them turning into NPAs.
The restructured advances as a proportion of advances stood comparatively lower at 2.48% (March 2013:
1.71%) for private sector banks as on March 31, 2014. An industry-wise analysis of NPAs shows that the major
industries which have been putting pressure on asset quality are infrastructure (especially power), iron & steel,
textiles and aviation. During FY14, some of the banks have sold their NPAs to Asset Reconstruction Companies
(ARC). The banks under study sold assets of around Rs.10,000 crore to ARCs during FY14 as compared to
around Rs.500 crore during FY13. Assuming, these assets sold were part of the banks books the Gross NPA
ratios would be higher by 30 bps.
The following graph shows the trend of Gross NPA (%) and restructured advances (%) from March 2012 to
March 2014.
Figure 1. Trend in Gross NPA ratio and Restructured Assets to Advances ratio

Source: CARE, Banks

Banking Performance Study

Banking

Restructured assets book has consistently increased from Rs.2.6 trillion at the end of FY12 to Rs.3.9 trillion as
on March 31, 2014. The major sectors contributing to restructured accounts were Infrastructure, Power, Iron
& Steel, Textiles and Aviation.
An analysis of the progress report of the Corporate Debt Restructuring (CDR) Cell during the period March,
2012 to March, 2014, shows that the major sectors where maximum cases of restructuring have been
approved are iron & steel, infrastructure, textiles and power. The following table shows the amount approved
under CDR for the top four industries during FY12 to FY14 and their percentage share in the total amount
approved for CDR.
(Rs crore)
Industry

31-Mar-12

% share

31-Mar-13

% share

31-Mar-14

% share

Infrastructure

16,774

11.14

21,912

9.60

57,233

20.72

Iron & Steel

39,252

26.08

52,682

23.00

43,539

17.96

Power

4,838

3.21

18,460

8.10

19,138

10.85

Textiles

11,661

7.75

17,767

7.80

20,138

8.31

150,515

100.00

229,014

100.00

242,259

100.00

Total

Source: www.cdrindia.org
Note: These amounts do not account for the restructuring done by banks on a bilateral level

Total amount approved under the CDR package increased on a y-o-y basis by 5.8% in FY14 as compared to a
stupendous rise of 52.2% in FY13. There was a decline in the growth of restructured assets, since RBI allowed
withdrawal of restructured accounts upon satisfactory conduct for the specified period resulting in older
restructured accounts moving out of CDR.
Credit growth
As per RBIs weekly statistical supplement, credit growth of Scheduled Commercial Banks (SCB) on a y-o-y
basis as on April 4, 2014 stood at 13.8% which was slightly lower than 13.9% witnessed in FY13. From a
sectoral point of view, agriculture & allied activities saw a credit growth of 13.5% (FY13: 7.9%), industries 13.1% (FY13: 15.1%), services - 16.1% (FY13: 12.6%) and personal loans - 15.5% (FY13: 14.7%).
The following table shows the credit growth percentage for public sector banks and private banks covered in
our study.

Banking Performance Study

Banking

31-Mar-12
Advances

31-Mar-13

31-Mar-14

Amt (Rs
bn)

Y-o-Y
growth
(%)

Amt (Rs
bn)

Y-o-Y
growth
(%)

Amt (Rs
bn)

Y-o-Y
growth
(%)

Overall

47,791

17.84

55,745

16.64

63,820

14.49

Public Sector Banks

38,795

17.25

45,125

16.32

51,483

14.09

Private Sector Banks

8,996

20.44

10,619

18.05

12,337

16.17

Deposit growth
As on April 4, 2014, SCBs showed a deposits growth of 15% (y-o-y) as compared to 13.1% for FY13. Term
deposits recorded a growth of 14.97% (FY13: 14.2%) as compared to a growth of 15.21% (FY13: 4.8%)
registered by demand deposits.
The following table shows the deposit growth percentage for public sector banks and private banks covered in
our study.

Deposits

Overall
Public Sector Banks
Private Sector Banks

31-Mar-12
Amt
Y-o-Y
(Rs bn)
growth
(%)
60,881
15.25
50,020
15.01
10,861
16.36

31-Mar-13
Amt
Y-o-Y
(Rs bn) growth
(%)
70,140
15.21
57,457
14.87
12,683
16.77

31-Mar-14
Amt
Y-o-Y
(Rs bn) growth
(%)
80,334
14.53
65,889
14.68
14,444
13.89

The proportion of low cost Current Account Saving Account (CASA) deposit stood at 32.0% as on March 31,
2014 as compared to 32.9% as on March 31, 2013 for the banks under study. The CASA proportion for public
sector banks was 30.5% (P.Y.: 31.7%) and for private sector banks it was 38.89% (P.Y.: 38.5%) as on March 31,
2014. The high proportion of CASA deposits among private sector banks is largely driven by large private
sector banks.

Financial performance for the year ended March 31, 2014

Pressure on margins and asset quality stress has impacted profitability especially for public sector banks
The 39 banks covered in our study showed that the growth in total income continued to show moderation to
12.5% (y-o-y) during FY14 as compared to 15.7% (y-o-y) growth during FY13. The overall Profit After Tax (PAT)
declined by 11.3% (y-o-y) during FY14 as compared to growth of 10.0% during FY13.

Banking Performance Study

Banking

Growth Y-o-Y %
Category
Overall
Public Sector Banks
Private Sector Banks

Net Interest Margin (NIM) (%)

FY12
2.86
2.78
3.17

FY13
2.73
2.58
3.26

FY14
2.64
2.45
3.35

Return on Total Assets (ROTA)

(%)
FY12
FY13
FY14
1.01
0.88
1.52

0.96
0.78
1.61

0.74
0.50
1.65

The impact of moderation in credit growth and slowdown in the manufacturing and core sector was largely
felt by the public sector banks as they were unable to maintain spread in FY14. The Net Interest Margin (NIM)
for public sector banks declined to 2.45% for FY14 as compared to 2.58% for FY13. NIM was also impacted
partially due to interest reversals on NPAs with large addition of NPAs during the year.
Due to contraction in margins coupled with rise in provisioning (mainly for NPAs) on account of worsening
asset quality and rise in operating costs the profitability of public sector banks was impacted. The public sector
banks under study reported de-growth of 26.8% in Profit After Tax (PAT) during FY14 as compared to growth
of 2.2% in FY13 over FY12. Public sector banks other than the State Bank of India (SBI) group reported degrowth of 28.9% in PAT for FY14. Of the 26 PSU banks under study, only four banks reported a rise in PAT of
15.5% over FY13. Two public sector banks reported a net loss in FY14.
The private sector banks were able to maintain their margins and asset quality due to which they were able to
report a growth of 18.2% in PAT for FY14. In fact for private sector banks there was a marginal improvement in
NIM and ROTA in FY14.
The provisioning cost (excluding provision for Income Tax) for banks under study increased by 36.6% (y-o-y) in
FY14. Overall provisions for public sector banks increased by 37.9% and for private sector banks the provisions
increased by 25.6% during FY14. The provisioning cost as a proportion of operating profit (NII plus other
income minus operating expenses) stood at 61.3% for PSBs as compared to 15.4% for private sector banks for
FY14 indicating credit costs largely impacted the profitability of PSBs.
To summarize, the profitability of the public sector banks was largely impacted on account of slowing
economy leading to weakening of income profile, pressure on margins and higher provisioning on account of
weakening asset quality. On the other hand, the private sector banks continued to show stable growth in
income and were able to maintain profitability and asset quality.

Banking Performance Study

Banking

Capital Adequacy
Capital Adequacy remained comfortable but need for raising additional capital to meet Basel III norms
The capital adequacy levels for the select banks continued to be comfortable with strong levels of core (Tier I)
capital. The overall median CAR stood at 11.54% as on March 31, 2014 as compared to median CAR of 12.59%
as on March 31, 2013.
As mandated by the RBI, Indian banks started computing and reporting CAR under Basel III from quarter ended
June 30, 2013. The median Tier I CAR under Basel III was at 8.86% with the median Tier I CAR for private sector
banks being higher at 12.62% as on March 31, 2014 which was higher than stipulated minimum of 6.5% as on
March 31, 2014 during the transition phase of fully shifting to Basel III by March 31, 2019.
Category

Median CAR (%)

31.03.12

31.03.13

Basel II

Median Tier I CAR (%)

31.03.14
Basel III

31.03.12

31.03.13

Basel II

31.03.14
Basel III

Overall

13.26

12.59

11.54

9.45

9.12

8.86

Public Sector Banks

12.92

12.10

11.03

8.99

8.49

8.11

Private Sector Banks

14.00

14.73

14.77

11.37

12.05

12.62

Capital requirement for complying with the Basel III requirements

In order to comply with the Basel III norms Indian banks would be required to raise substantial quantum of
capital in the next five years. As per CAREs estimates, the total equity capital requirement for Indian banks till
March 2019 (when Basel III would be fully implemented) is likely to be in the range of Rs.1.5-1.8 trillion
assuming average GDP growth of 6% and the average credit growth is in the range of 15% to 16% over the
next five years. It is also estimated that the banks will earn a return on total assets at 0.6% and would maintain
some cushion over the minimum regulatory requirement of CAR.
In the Budget 2014-2015, the Government indicated that it would continue to maintain the majority
shareholding in public sector banks while increasing the autonomy and accountability of the banks. This is a
credit positive for the banks. The interim budget had an allocation of Rs.11,200 crore for capitalisation of
public sector banks, however, a large part of capitalisation of the banks now would be through capital
markets. Also, currently the market appetite for Additional Tier I debt instruments permitted under Basel III is
low considering stringent loss absorption features of the instruments. This may pose a challenge for banks and
some of the banks may have to rely on raising core equity capital.

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Outlook
During FY15, the RBI is likely to keep its focus on inflation in view of uncertain monsoon, due to which the
interest rates are likely to remain more or less stable during the year. CAREs GDP growth forecast for FY15 is
between 5 % to 5.5% considering the new governments plan to focus more on investment in infrastructure,
time bound action and improved co-ordination between the Central and State Governments to ensure smooth
implementation of new Government policies. However, the recovery is expected to remain gradual in nature.
Improvement in overall economic growth and governmental clearances in projects would help recovery of the
sectors like infrastructure and manufacturing which in turn would help credit growth. The credit growth is
estimated in the 15% - 16% range while deposit growth is estimated at around 14% to 15% during FY15 in
tandem with the credit growth.
Improvement in economic environment is expected to reduce the stress on the asset quality of banks and
reduce the pace of NPA addition, which in turn is expected to improve profitability of the banks. However, the
improvement would be gradual and would reflect in the second half of FY15. The Gross NPA ratio is estimated
to be marginally higher at around 4% by end of FY15 as against 3.85% as end of FY14.
The capital adequacy levels for the select banks continued to be comfortable during FY14. However, going
forward, the banks especially public sector banks would require to raise additional equity in order to meet the
more stringent Basel III norms and also maintain a cushion over the regulatory minimum.
Contact:
Anuj Jain
Asst. Gen Manager
anuj.jain@careratings.com
91-022-67543451

Aditya Acharekar
Sr. Manager
aditya.acharekar@careratings.com
91-022-67543629

Pankaj Naik
Manager
pankaj.naik@careratings.com
91-022-6754 3534

Disclaimer
This report is preparedby the Banking Division of Credit Analysis &Research Limited [CARE]. CARE Ratings has taken utmost care to
ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the
accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or
omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially
states that CARE Ratings (including all divisions) has no financial liability whatsoever to the user of this report.

Banking Performance Study