Mumbai: Standard Chartered Plc’s profit before tax from Indian business in the first half of 2011 fell as income fell and the bank decided to set aside more money anticipating rise in bad loans in the second half.
Profit before tax in January-June at $378 million (Rs 1,678 crore) was 39% lower than what the UK-based bank earned in the same period last year—$624 million.
Globally, profit rose 17% to $3.64 billion on a $8.76 billion revenue, which rose 11%.
Its Indian operations put up the worst performance among Standard Chartered Bank’s eight regions. Africa is the only other region in which profits dropped, but only by 6%.
With this, India is no more the largest contributor to Standard Chartered’s profit globally. It has dropped to No. 3, behind Hong Kong and Singapore.
Neeraj Swaroop, chief executive officer, India and South Asia, described the first six months of 2011 as “challenging” because of rising interest rates, slowdown in the economic environment and increased competition. This is the first time the bank’s profit growth has dropped at least in past six years since Swaroop took over as India head.
“We have seen 11 rate increases since March last year and a slowing economy has led to slippage in deals,” he said. Also, the Reserve Bank of India’s (RBI) decision to increase savings bank interest increased the bank’s fund cost.
In May, RBI asked banks to pay 4% on money kept in savings bank accounts, up 50 basis points (bps) from 3.5%. One basis point is one-hundredth of a percentage point.
Standard Chartered’s income dropped 12% to $893 million from $1.01 billion last year, while expenses increased 13% to $390 million in January-March.
The bank provided $125 million for bad loans, including $53 million for corporate bond investments, which pulled down profits, Swaroop said.
“The results are not a consequence of irrational lending,” Swaroop said. “Though consumer and commercial businesses have seen a slowdown and margins have contracted, the provision charges are the only reasons.”
Standard Chartered’s Indian depository receipts (IDRs) ended at Rs 91 apiece, up 0.94% even as the benchmark 30-share Sensex dropped 0.94% to 17,940 points.
IDRs are securities that represent an ownership interest in a fixed number of underlying equity shares of the issuing company. Standard Chartered is the first and only overseas firm to have listed IDRs. It sold 240 million IDRs in May 2011 at Rs 104 each. “Sharper declines in profit was due to provision. There is no rise in non-performing assets (NPAs). It’s only an extra charge for potential NPAs,” Swaroop added, but did not give details of the corporate bond on which the extra provision had been made.
Standard Chartered India’s gross NPAs increased to $330 million from $250 million last year.
Rajeev Mehta, research analyst at India Infoline Ltd, said he expects the current macro challenges to continue for at least two to three quarters from now.
“Bank loan growth has decelerated to 18% in the last three to four months and it may ease further to 17%,” Mehta said. “Rates have peaked but may not come off soon, which will endanger credit growth.”
A lacklustre capital market has also impacted fees from that business for banks, Mehta said.
Standard Chartered’s 45% income in India has come from fees and 55% from interest, the bank said.
Net interest margins, or the difference between interest earned and interest expended, dropped to 3.1% from 3.8% last year. Swaroop said the bank expects to maintain margins for the second half of 2011.
“We remain cautious in the immediate term but the momentum remains good,” he said. “We are confident of the long-term prospects.”
A bank release said project and deal flow in India has slowed on the back of governance concerns in the market.
“We reiterate our view that India will be the third largest economy in the world by 2030, and given our strength and competitive position, we are well positioned for the upturn,” it said.