The alarming state of Public Sector Banks-Part 2

Central Bank of India

Central Bank of India (CBI) is the 7th largest public sector bank in India. CBI is one of the weak banks that is not being merged with another bank. It reported a small net profit of Rs 138 crore in the second quarter of FY'20 after posting 14 consecutive quarters of losses. It is looking at monetising its investment in the home finance subsidiary and its joint venture in Zambia. This public sector bank has recently said that it is planning to sell its investments lock, stock and barrel in its subsidiary Cent Bank Home Finance Ltd and joint venture Indo-Zambia Bank. It has also started taking approvals for raising equity capital by allotting preferential shares to the government. Government has announced capital infusion of Rs 70,000 crore in various state-run banks in this financial year. Central Bank of India is set to get Rs 2,560 crore capital infusion from the government through preferential allotmentin FY 19-20, to meet the minimum capital requirements. CBI's Capital Adequacy Ratio (as per Basel-III) stood at 9.61% with Tier I at 7.49% and Tier II 2.12% for the financial year ended March 31, 2019.

In June 2017, Reserve Bank of India (RBI) had placed Central Bank of India under the prompt corrective action (PCA) framework which puts restrictions on lending, hiring and expanding branches. In order to shore up its capital, the bank had sold close to Rs 23,000 crore of standard loans in FY 2016-17. As a result, though the bank met its capital requirements, but the share of problem loans rose.

During the last 5 year period from FY'15 to FY'19, Central Bank of India's deposits have grown by 18% from Rs 2.55 lakh crore to Rs 3 lakh crore, but its loan book size has shrunk by 21% from Rs 1.88 lakh crore in FY'15 to Rs 1.47 lakh crore in FY'19. This indicates that the incremental deposits are going more into investments. The bank's credit to deposit ratio (CD ratio) has declined significantly from 74% in FY'15 to 49% in FY'19. The CD ratio has come down more significantly in the three years period after the bank was placed under PCA in 2017. In retrospect, it indicates that the PCA framework of placing restrictions on lending, but without any corresponding restrictions on accepting deposits can be a risky recipe.

In the 5 year period from FY'15 to FY'19, Central Bank of India has incurred a total net loss of about Rs 14,000 crores. The bank's profitability ratios have steadily declined during the last 5 years. CBI's cost to income ratio has increased from 30.15% in FY'15 to 59.18% in FY'19. Its return on assets has declined from 0.21% to (minus) 1.70%. CBI's return on equity has declined from 3.87% to (minus) 29.79% between FY'15 and FY'19.

CBI's Gross non-performing assets stood at about 22 per cent of gross advances at end of March 2019 and Net NPAs stood at 7.73 per cent. The bank's gross NPAs have shot up from 12% in FY'15 to about 22% in FY'19. Its total gross NPAs are Rs 32,356 crore against a loan book of Rs 1.47 lakh crore in FY'19. It means that the bank has standard advances of 1.15 lakh crore (Rs 1.47 lakh crore Minus Rs 0.32 lakh crore) against total deposits of Rs 3 lakh crore as on 31.03.2019. CBI's low credit to deposit ratio of 49% diminishes the bank's core lending activity.

CBI has a net worth of Rs 18,934 crore as on 31.03.2019, against which it has a net NPA amount of Rs 11,333 crore to be provided for. Thus the adjusted net worth of bank will be Rs 7,600 crore. Against its net worth, CBI has a large "deferred tax asset" of Rs 7,894 crore at the end of FY'19. A deferred tax asset is a mere book asset, which can be realised only when the bank makes sufficient profits.

Like other weak public sector banks, CBI is also walking on thin ice.

UCO Bank

Founded in 1943, UCO Bank is another major public sector bank. UCO Bank's Gross NPA was Rs 29,786 crore and Net NPA was Rs 9,650 crore in March 2019. Reserve Bank of India (RBI) had placed UCO Bank under the prompt corrective action (PCA) framework in May 2017. UCO Bank is one of the week banks that is not being merged with a bigger bank, because of its regional focus.

UCO Bank's gross NPAs were 4.32% in March 2014, which have gone up by almost 6 times to 25% by March 2019. Its Net NPAs as at March 2019 were 9.72% against 2.38% as at March 2014.

The bank's profitability ratios have significantly deteriorated during the last 5 years between FY'15 and FY'19. The bank's cost to income ratio has shot up from 30% in 2014 to 64% in 2019. Its return on assets has declined from 0.46% to (minus) 1.84%. UCO Bank's return on equity has declined from 9.52% to (minus) 37.75% between FY'15 and FY'19.

UCO Bank's tier-1 plus tier-2 capital adequacy (Basel- III) stands at 10.70% as at March 2019, against RBI's mandatory requirement of 10.5% including the capital conservation buffer. The government had infused Rs 3,330 crore equity into the bank to improve its capital adequacy. The bank has recently approached LIC for Rs 1,000 crore of equity infusion.

UCO Bank is on verge of coming out of RBI's PCA framework, as far as capital adequacy requirement is concerned. To effectively come out of RBI's PCA framework, UCO Bank also needs to pass through the other criterion like return on assets and Net NPAs.

UCO Bank has incurred a total net loss of close to Rs 12,300 crore during last 5 years from FY'15 to FY'19. Due to restrictions on advances on account of PCA framework and capital constraints, UCO Bank's total loan book (total advances) has come down significantly from Rs 1.47 lakh crore in FY'15 to Rs 0.99 lakh crore in FY'19. Its credit to deposit ratio has declined from 70% to 50% during the same period.

While the bank's capital base is steadily increasing, its loan book is steadily declining, which in turn is depressing return ratios. The bank needs to improve the return on equity ratio to positive territory, before seeking further capital. With a negative return on equity of (-) 37%, the destruction in shareholders worth is evident from the fact that the book value per share of Rs 107.91 in 2015 has deteriorated to Rs 12.82 per share in 2019. The bank has already diluted its equity significantly during the last 5 years.

Indian Overseas Bank

In 1937, Thiru. M. Ct. M. Chidambaram Chettiyar established the Indian Overseas Bank (IOB) to encourage overseas banking and foreign exchange operations. IOB started up simultaneously at three branches, one each in Karaikudi, Madras, and Rangoon (Yangon). In 1969 the Government of India nationalised IOB.

Indian Overseas Bank is one of the week banks that is not being merged with a bigger bank, because of its regional focus. IOB was also placed under PCA framework. The bank's Gross NPA of 8.33% in FY 2015 have gone by almost three fold to 21.97% in FY 2019. Its net NPA in FY 2019 remains at an elevated level of 10.81%. During the five year period, its loan book has shrunk from Rs 1.72 lakh crore to Rs 1.33 lakh crore. Its total deposits have however remained stable around Rs 2.2 lakh crore mark during the last five year period. The credit to deposit ratio has declined from 77% in 2015 to 61% in 2019.

The bank has significantly diluted the equity during the last five years, in order to maintain capital adequacy. The bank's capital adequacy remained around 10% during the last five years. Government has recently infused fresh capital of Rs 3,806 crore in IOB through a preferential allotment of shares. With this equity infusion, government's holding in IOB has gone up to 92.52%. The destruction in shareholders worth is evident from the fact that the book value per share of Rs 112.80 in 2015 has deteriorated to Rs 17.90 per share in 2019.

IOB has reported a total net loss of about Rs 17,000 crore in the last 5 years. The bank's cost to income ratio has gone up from 30.58% in 2015 to 60.55% in 2019. The bank's profitability ratios have significantly deteriorated in the last 5 year period. Its return on assets has declined from (minus) 0.15% to (minus) 1.49%. Its return on equity has declined from (minus) 3.26% to (minus) 22.84%. IOB also has a "deferred tax asset", which can be realised only when the bank makes sufficient profits..

IOB's capital base has bloated due to many equity infusions. Government's holding in the bank has gone up to 92.52%, limiting the scope for further equity infusion by the Government of India. The bank's total business is relatively small at less than Rs 4 lakh crore, which can not support a further bloating of capital base.

Here you can read the first part: