Have PSBs become resilient?

Have PSBs become resilient to absorb stress shocks?

Recently, my friend  working in a Public Sector Bank (PSB), sent a performance comparison  among PSBs based on their financials as on 30th September 2023. Out of 26 parameters compared, 12 relate to business levels, 13 are in respect of operating results and one is in respect of capital adequacy ratio (CAR). He is fond of Bank of Maharashtra (BoM), which is the third smallest PSB in terms of total business. (Uco Bank and P & S Bank are behind BoM). The comparison sheet showed that BoM occupied the first position in 21 out of 26 ratios compared. Since I have detailed my views on BoM in another of my blog recently, I used the information to study the performance of PSBs in general. My impressions are as under:

1. The total business of all PSBs are on an upward path. The pace of growth in gross advances is much more than the pace of growth in total deposits, resulting in an increase of CD ratio among all PSBs.

2. The growth of non-corporate advances, referred to as RAM (Retail Agriculture and MSME) advances,  is higher than corporate advances. In particular, the growth in retail advances averaged around 20% followed by increase in average agricultural advances by 15% (of course, the significant increase in agricultural advances had come from agri. gold loans)

3. Net NPAs of all PSBs are less than 2%, though one could observe that even now, 9 PSBs have a GNPA ratio of more than 4%

4. Net Profit of 9 PSBs had grown by more than 20%, though four PSBs had reported a fall in operating profit for the quarter ended Sep' 23 (Y-o-Y)

5. Consequent to the increase in net profit, RoA and RoE, derivatives of net profit, show marked improvement in relation to the past.

6. CAR of all PSBs are at least 200 bps higher than the regulatory ratio of 11.5%

In my view, the impressive financial results can be attributed to three factors:

i. Higher Net Interest Income: is on account of incremental advances outpacing incremental deposits and the concentration on high yielding advances, both of which resulted in incremental interest inflows higher than interest outflows.

ii. Fresh slippages to NPAs have been minimum, implying more interest income and less provision requirements.

iii. Operating expenses remain constant or show a modest increase due to merger of PSBs, which resulted in streamlining of branches/administrative offices and there was no need to go in for a large scale recruitment of staff at various levels. 

Are PSBs resilient to withstand stress shocks: While the financials definitely indicate that all PSBs (including the ones which came out of PCA/laggards in the past) have turned around impressively, even without any fresh equity infusion from the central government in the last three years, the question that arises in everyone's mind is 

- Are the financials resilient enough to absorb shocks during a period of stress? Most of the PSBs are still dependent on increase in NII for reporting improved operating profit/net profit.  

The growth in NII slows down/is threatened in any or combination of the following scenarios.

a. Slow down in growth of advances, particularly in the high yielding retail sector.

b. Increase in interest expenses either due to growth in deposits matching with the growth in advances or the increased cost of deposits mobilised

c. Increased delinquencies resulting in less/nil interest income and added provisions on such delinquencies.

While RBI conducts various stress tests to determine the resilience of the banking sector with proven methods, I attempted a stress test on their operating profit (OP)  and net profit(NP) based on (1) the percentage of OP to NII and (2) conversion percentage of net profit from operating profit (OP). The table prepared is as under:

Bank	NII (Rs. in cr.)	OP (Rs. in cr.)	OP/NII (%)	NP (Rs. in cr.)	NP/OP (%)	CD Ratio (%)@	CASA (%)
BoB	10831	8020	74	4253	53	77.7 (76.5)	39.9
BoM	2432	1920	79	920	48	76.5 (71.9)	50.7
IB	5741	4303	75	1968	45	74 (69.5)	40.1
IOB	2346	1677	71	625	37	72 (58.9)	43.9
PNB	9923	6216	63	1756	28	71 (69.1)	42.1
BoIndia	5740	3756	65	1458	39	75.6 (73.4)	43.1
Canara Bank	8903	7616	85	3606	47	76.8 (71.1)	32.1
Union Bank of India	9126	7221	79	3511	48	73.3 (71.5)	34.7
SBI	39500	19417	49	14330	74	64 (62.8)	41.9
Central Bank of India	3028	1530	50	605	40	62.4 (56.6)	49.4
Uco Bank	1913	982	51	402	41	58.6 (52.7)	38.2
P & S Bk	675	260	39	189	72	70.3 (71.5)	31.1

@ Figures in brackets under CD ratio indicate the ratio in June 22. The jump is more than 6% in many banks.

My Views: 

1. Banks, which report a higher OP/ NII, implying more dependence of OP on NII, suffer most during stress period, as interest income on existing advances comes down and sanction of new advances declines. In the same way,  banks, which are able to retain at least 60% of their OP as NP (after providing for tax expenses and loss provisions) during the boom period only stand a better chance to withstand/absorb shocks in periods marked by slow growth in advances and increased delinquencies. From the table above, only SBI appear to pass the two tests successfully.

2. Though CAR of PSBs appear robust now, to absorb shocks during stress period, building CAR through retained earnings may prove inadequate. Even if the need for counter cyclical capital buffer (CCCB) do not exist in the present circumstances, PSBs need to infuse fresh equity, along with retained earnings, to remain resilient. The PSBs may keep in mind the wage revision, provisionally agreed at 17% between IBA and UFBU will result in a jump in staff expenses on account of revision in pay and additional provisions to be made in pension liability, arising out of actuarial valuations. 

3. Bringing more demand deposits and improve fee based income including forex and recovery from written off accounts shall be the immediate and ever defined priorities.

Regards

V.Viswanathan

30th December 2023

 Annexure: I

PSB Comparison Sep 23