Top 5 Indian PSU Banks with the Lowest NPAs

Last month, we wrote to you about the top 5 Indian private banks with the lowest NPAs in FY24. We elaborated on how they managed to keep their NPAs low and the road ahead for them.

In this article, we delve into their PSU counterparts.

Public Sector Undertaking (PSU) banks play a pivotal role in India's banking sector, commanding a significant market share and fostering financial inclusion across the country.

However, the sector has been plagued with high NPAs since many years.

What are NPAs?

NPAs or non-performing assets are loans or advances issued by banks or financial institutions that no longer bring in money for the lender.

This is because the borrower has failed to make payments on the principal and interest of the loan for at least 90 days.

Non-Performing Assets (NPAs) are critical, as they reflect the quality of a bank's loan portfolio. A lower NPA percentage signifies better asset quality and prudent risk management.

However, this has changed in recent months.

A survey conducted by industry body FICCI and Indian Banks' Association (IBA) found that all public sector banks in India have showed a reduction in non-performing asset levels over the last six months.

Only 67% of private sector banks reported a decline during the period.

In this article, we delve into the top five PSU banks with the lowest NPAs, highlighting their strategies, and financial health.

Let's take a look.

#1 Bank of Maharashtra

First on our list is Bank of Maharashtra.

The public sector bank is engaged in retail banking, corporate/wholesale banking, priority sector banking, treasury operations and other banking services.

The bank's net NPAs stand lowest among PSU banks at 0.2% of total advances.

Gross NPAs stood at 1.88% as against 2.04% as on 31 December 2023.

The company has improved its asset quality drastically, with the NPAs going from 0.97% in FY22 to 0.2 in FY24 while maintaining a healthy NIM of 3.9%.

Shares of the bank have risen more than 110% in the last year, driven by strong growth in recent quarters, driven by traction in credit growth in corporate and RAM segment.

The bank's net profit has grown at a CAGR (compounded annual growth rate) of 23% in the last five years. This growth has resulted in a return on equity (RoE) of 22.8% in March 2024.

The bank recently raised Rs 10 bn via QIP route.

It plans to make continued investments in digital initiatives, AI-based customer service, and straight-through processing journeys to enhance customer experience and operational efficiency.

#2 State Bank of India

Second on our list is State Bank of India, India's largest PSU bank by assets and by market capitalisation.

Despite the bank's troubled background, its financial situation has improved over the years.

For FY24, the bank's net NPA's stood at 0.57% of total advances. Its gross non-performing assets (NPA) ratio also improved to 2.24% as against 2.42% led by lower slippages.

With respect to earnings, the banks net profit has doubled over the last five years. This has propelled the lender's Return on Equity (RoE) to 20.3% in the financial year 2024.

Shares of State Bank of India are currently up 48% in the last year. The bank is expecting loan book growth of 13-15% in the future and is confident of sustaining returns over the long term.

It is confident of growth going forward led by the government's capital outlay plans and an uptick in the credit demand across the country.

Moreover, it is confident in generating sufficient capital organically to fund the growing business.

#3 Bank of Baroda

Third on the list is Bank of Baroda.

The bank is the third largest Indian PSU bank by market capitalisation.

It offers a wide range of banking services, including personal, corporate, international, rural, small and medium enterprises (SME), non-resident Indian (NRI) services, and treasury services.

In FY24, the bank's net NPAs came in at 0.68% of the total advances. Gross non-performing asset (NPA) came in lower at 2.92% against 3.08% in the December 2023 quarter and 3.79% in the March 2023 quarter.

The bank holds total provisions (including specific, standard, Covid-19 related etc.) of Rs 117 bn against this.

The bank's net profit has also grown at a 5-year CAGR of 77% driven by controlling operating costs and maintaining net interest margin.

Tracking this, the company's ROE has also grown to 18.95%.

Bank of Baroda has reduced the dependence on manual transactions and increased the proportion of digital transactions.

This helped the company cut its costs and improve its advances and deposits growth without additional costs.

Going forward, it plans to introduce new retail products to enhance its deposit growth, optimise costs through digital transformation, and utilise technology to grow its advances and loan book.

With digitalisation and urbanisation taking a front seat, the banking sector is expected to see rapid growth in the years to come, and Bank of Baroda is set to benefit from it.

#4 Indian Bank

Fourth on the list is Indian Bank.

The bank offers deposits, loans and services. Its segments include treasury, corporate/wholesale banking, retail banking and other banking operations

The bank's net NPAs stood at 0.43% of the total advances in FY24. Gross NPAs came in lower at 3.95% in the March quarter, from 4.47% in the preceding quarter.

The bank's steady margins have culminated into a strong profitability, with the net profits reporting a 5-year CAGR of 86%.

The bank's RoE stands at 19.06% as of March 2024.

Going forward, the management has guided for margins in the range of 3.4% to 3.5%. It also expects to maintain its net interest income growth, and overall profitability.

It is witnessing opportunities in new business segments like data centers, city gas, and commercial real estate.

#5 UCO Bank

Last on our list is UCO Bank.

The lender offers a host of value-added banking solutions to its customers including international banking services, services for NRIs loan schemes, deposit schemes, and value-added e-banking solutions.

The bank's net NPAs stood at 0.89% of total advances in 2024. Gross NPA stood at 3.46% of gross advances as against 3.85% as on 31 December 2023.

While the bank had reported gross NPAs of 7.89% in March 2022, this has now improved.

The improvement in net profits and the margins have helped boost the return ratios. The bank's net profit has grown at a CAGR of 190% in the last three years. The RoE reported by the company stands at 13.1%.

The management of the bank aims to continue working on operational efficiency to improve its return ratios.

It is also focussing on improving CASA for low-cost deposits and monitoring pricing closely to protect net interest margins.

Besides this, it is working towards building a strong loan portfolio and managing credit costs.

To Conclude

From an investment point of view, analysing the non-performing assets (NPAs) of banks is a crucial step in assessing their financial health and potential for returns.

Low NPAs indicate that a bank has strong credit risk management practices, ensuring that the loans it extends are likely to be repaid on time. This minimises the risk of default and protects the bank's profitability.

For investors, this translates into a more stable and predictable earnings stream, which is a vital consideration when seeking reliable returns.

Banks with low NPAs are better positioned to weather economic downturns and market volatility. They are also in a better position to pay dividends, providing investors with a regular income stream.

However, while low NPAs indicate good management, it's crucial to ensure that this performance is consistent over time.

Moreover, past performance is not always indicative of future results. Even banks with a history of low NPAs can face unexpected challenges.

Continuous monitoring of a bank's performance and adapting to changing conditions is necessary for making informed investment decisions.

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