India’s top PSU banks see 9.2% growth in aggregate net profits

At long last, the public sector banks in India are having a good time. For the quarter ended June 2022, with most of the major PSU banks having already declared their quarterly results, the profits of public sector banks at an aggregate level were up 9.2% at Rs15,306 crore for Q1FY23. What is interesting is that out of the 12 PSU banks in India (after all the mergers and realignments), 3 major lenders saw a fall in profits on account of higher mark to market losses written off in the investment portfolios. That was obvious amidst rising bond yields.

Over the last 5 years, the government has undertaken a series of consolidation measures in the banking sector resulting in the number of entities reducing drastically. Now there are just 12 banks that are left in the PSU space, with most of them having substantial clout in terms of capital, reach and overall business comprising of deposits and loans overall. The cumulative profits of these 12 public sector banks for the June 2022 quarter stood at Rs15,306 crore, higher by 9.2% compared to the net profits of Q1FY22 ended June 2021.

What is gratifying is that this growth in net profits of the PSU banks was in spite of the larger lenders like State Bank of India, Punjab National Bank and Bank of India reporting lower profits ranging from 7% to 70% lower. In the June 2021 quarter, the combined profits of the PSU banks stood at Rs14,013 crore. However, in that particular quarter, SBI had reported higher profits and contributed to the aggregate gain. In contrast, in Q1FY22, the 9.2% aggregate profit growth has come despite the sharp fall in profits reported by SBI.

Typically, MTM losses have to be written off in the books of a bank when the bond yields go up. Normally, bond prices are inversely related to the bond yields, so when bond yields go up the bond prices will come down. As a result, that part of the portfolio of bonds which is marked to the market, needs to be written down to the extent that the market price or the notional yield-based price is lower than the purchase price. While 3 lenders viz. SBI, PNB and BOI reported fall in profits, the other 9 banks reported growth in profits.

The nine profit making PSU banks recorded profit growth ranging from 3% to 117% on a yoy basis in Q1FY23. Among the big profit growers were Bank of Baroda, which saw its net profits grow 79% yoy at Rs2,168 crore for the June 2022 quarter. On the other hand, the net profits of Bank of Maharashtra more than doubled to Rs452 crore in the June 2022 quarter. Despite the fall in profits to Rs6,068 crore, the industry leader SBI, still contributed nearly 40% to the overall profit pool of PSU banks. BOB made the second highest contribution.

The early signals were visible in the financial year 2021-22 itself. In FY22, the collective net profits of all the public sector banks put together more than doubled to Rs66,539 crore as compared to Rs31,816 crore in FY21. Interestingly, after a very long time, many of the PSU banks even managed to declare dividends to shareholders as they finally appeared to extricate their business from the last decade of mess created by NPAs. PSU banks had made persistent losses at an aggregate level for five full years between FY16 and FY20.

In terms of the magnitude of the loss, the highest net loss was registered in FY118 at a whopping Rs85,370 crore. This was followed by a combined loss of Rs66,636 crore in FY19, Rs25,941 crore in FY20, Rs17,993 crore in FY16 and Rs11,389 crore in FY17. Hopefully, the PSU banks have exorcized the ghosts of the past and left the worst behind them.