How public sector banks are outperforming private sector banks? | Q3 FY22 Banking Sector’s- Best Performing Quarter over Last 6 years

In this article, we will be discussing the performance of all the banks including the private sector and public sector banks. This article will be a 3-point detailed analysis of the performance of these banks. So, let’s get started.

3-Point Analysis:

1) Q3FY22 Performance of Banks:

• In Q3 FY22, the Banking Sector Reported Best Quarterly Profits in over Last 6 Years or the Last 25 Quarters.
• This stunning performance of the banking sector was majorly led by the rising Profitability of Public Sector Banks.
• Over the last 25 quarters, PSU Banks reported Positive Net numbers 11 times & Private Banks reported Positive Net numbers 25 times (throughout every quarter).
• But for the past 7 straight quarters, PSU banks have been reporting a consistent & steady rise in Profit After Tax (PAT).
• PSU banks Net numbers made a turnaround in Q1 FY21.

2) Best Quarterly Profits for Banking:

i) Net Profit of Banking Sector:

• The Q4FY20 quarter was the worst quarter for the banking sector, especially for PSU banks. In Q4FY20, the losses of PSU banks were Rs. 26,444 Cr. For the same quarter, the profit of PSU banks was Rs. 5,477 Cr. taking to the total net loss of Rs. 20,967 Cr. in Q4FY20.
• The Q1FY21 turned out to be a turnaround quarter of the banking industry, especially for the PSU banks where the Net Profit of PSU Banks has grown from Rs. 6,001 Cr. in Q1FY21 to Rs. 10,167 Cr. in Q4FY21, and Rs. 18,308 Cr. in Q3FY22.
• The Private Bank sector also reported a surge in profitability since Q1FY21 from Rs. 14,319 Cr. in Q1FY21 to Rs. 26,866 Cr. in Q3FY22. The total net profit of the overall banking sector stood at Rs. 45,174 Cr. in the quarter ended 31^st December 2021.

ii) YoY and QoQ growths in Q3FY22:

• The Net Profit of PSU banks was Rs. 18,308 Cr. in Q3FY22 which increased by 136% YoY and 3.4% QoQ.
• The net profit of Private Sector Banks was Rs. 26,866 Cr. which grew by 36% YoY and 40% QoQ. Main drivers behind this growth in profitability of private sector banks:

• Lower Slippage
• Strong Recovery of expected bad debts
• Decline in provisioning

3) Banking Sector Asset Quality Improving QoQ

• The net profit of the total banking system stood at Rs. 45,174 Cr. in Q3FY22 which grew by 64.2% YoY from Rs. 27,516 Cr. in Q3FY21 and Rs. 36,854 Cr. in Q2FY22, which accounted for the growth of 22.6%.
• The Gross NPA of the banking sector stood at Rs. 7.57 Lakh Cr. in the quarter ended December 2021 which grew by 1.9% YoY from Rs. 7.43 Lakh Cr. in Q3FY21, but there is a decline of 3.4% QoQ from Rs. 7.84 Lakh Cr. in Q2FY22.
• Further, the Net NPA grew by 26.1% YoY but fell by 7.6% QoQ. The Net NPA of the banking sector was Rs. 1.74 Lakh Cr. in Q3FY21 and Rs. 2.37 Lakh Cr. in Q2FY22, which stood at Rs. 2.19 Lakh Cr. in Q3FY22.
• The Gross NPA % of the banking sector stands at 6.72% as of 31^st December 2021 falling by 50 bps YoY and 59 bps QoQ from 7.22% in Q3FY21 and 7.31% in Q2FY22.
• The Net NPA figures have also decreased for the Indian banking sector. The Net NPA which stood at 2.22% in Q2FY22 has gone down by 27 bps QoQ to 1.95% in Q3FY22. On yearly basis, the Net NPA has increased by 26 bps from 1.69% in Q3FY21.

i) Banking System GNPA As Per RBI’s Financial Stability Report (FSR)

• As per the estimation of the RBI Financial Stability Report for September 2022, there is the expectation of Gross NPA of 8.1% in the case of baseline scenario and Gross NPA of 9.5% in the severe stress scenario of the overall banking sector of India indicating a rise in the stress for the banking industry which was 6.9% in September 2021.
• This expectation of Gross NPA by RBI for PSU Banks for September 2022 stands at 10.5% in the baseline scenario and 11.9% in the severe stress scenario. The Gross NPA of PSU banks was 8.8% in September 2021.
• This expectation of Gross NPA by RBI for Private Sector Banks for September 2022 stands at 5.2% in the baseline scenario and 5.9% in the severe stress scenario. The Gross NPA of private sector banks was 4.6% in September 2021.
• This expectation of Gross NPA by RBI for NBFCs Banks for September 2022 stands at 6.5% in the baseline scenario and 9.1% in the severe stress scenario. The Gross NPA of PSU banks was 6.5% in September 2021.

ii) Asset Quality Trends – PSU vs Private Banks

• The Gross NPA of the PSU banks was 15.6% in FY18 which drastically fell to 9.3% in December 2020 and 8.4% in December 2021.
• The Asset Quality trend of Private Banks (Gross NPA) has remained consistent at the range of 3.5% -4.5%.
• As of Q3FY22, the total Gross NPA of the Banking System stood at Rs. 7.57 Lakh Cr. which grew by 1.9% YoY and de-grew by 3.4% QoQ.
• The PSU Banks Gross NPA was Rs. 5.93 Lakh Cr. in Q3FY22 declining by 3.5% YoY and 3.3% QoQ.
• The Private Sector Banks Gross NPA was Rs. 1.64 Lakh Cr. growing by 27.7% YoY and declining by 3.9% QoQ.

4) Balance sheet Stress Conditions:

• RBI noted in its FSR that banks would have sufficient capital, both at the aggregate and individual levels, even under stress conditions
• Restructured books indicate the possibility of future stress in lenders' balance sheets.
• The Restructured books in the total banking system were Rs. 2.63 Lakh Cr. which was 2.38% as a % of the outstanding loans.
• Here, SBI restructured its book worth Rs. 32,895 Cr. which was 1.2% of its outstanding loans.
• Suryoday Small Finance Bank restructured its book the highest of around 16% of its outstanding loans amounting to the value of Rs. 770 Cr.
• Kotak Mahindra Bank did the lowest restructuring of just Rs. 1,364 Cr. which was just 0.54% of its outstanding loans.

Last 1-year Stock Performance – PSU Banks vs Private Banks

• In the last 1-year, Canara Bank and Indian Overseas bank reported the highest returns of 50.2% and 50% respectively.
• In the last year, due to the turnaround of PSU banks turning profitable, these banks remained the outperformer as compared to private sector banks.

What Should Investors Do?

There has been a significant turnaround in the profitability and asset quality of the private and public sector banks. Meanwhile, in the last year, PSU Banks has given stellar returns while Private Sector Banks has yielded negative returns.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.

Originally Published On: https://blog.investyadnya.in/how-public-sector-banks-are-outperforming-private-sector-banks/