The Reserve Bank of India, or RBI, last week released data on 18 key performance indicators of commercial banks in India, such as return on assets, capital to risk weighted assets ratio, business per employee, growth in credit and deposits, among others, in the past five years.
If one adds two other indicators—net and operating profits—one could get a bird’s-eye view of the sector. Indeed, this has been a watershed period for banking, as riding high on ample liquidity and low interest rates, the loan assets of Indian banks had grown at more than 30% in three of the past five years.
Mint’s analysis of the compound annual growth, or CAGR, rate of certain key financial parameters is startling.
For instance, CAGR of operating profits of public sector banks, the mainstay of the industry, is negligible. At least 11 banks—nine of them are listed entities—have shown a decline in five-year CAGR of operating profits between fiscal 2004 and 2008.
Operating profit is an ideal yardstick to judge a bank’s health as it reflects its core competence. Net profit is arrived at after providing for corporate tax and non-performing assets, or NPAs. Once an asset is classified as NPA, a bank is required to provide for it.
Despite the anaemic performance in operating profits, state-run banks, by and large, have been able to post reasonable growth in net profits because of lower provisions. With the level of NPAs going down over the years, these banks do not need to provide much and, on top of that, recovery of bad assets for which provisions had already been made has helped them boost their profits.
Let’s take a close look at the performance of five large banks. Canara Bank and Bank of India’s (BoI) CAGR of operating profits has been negative while that of Bank of Baroda (BoB) and Punjab National Bank (PNB) is only marginally positive, between 0.78% and 1.19%. The exception is State Bank of India (SBI). CAGR of its operating profit is more than 22%.
Now, compare this with large private banks. The five-year CAGR of operating profit of Axis Bank Ltd is 31%, HDFC Bank Ltd, 29% and ICICI Bank Ltd, 25%. Large foreign banks are also not left behind. The five-year CAGR of operating profit of Standard Chartered Plc. is 20%, HSBC Holdings Plc. 30% and Citibank Inc. 24%.
The scenario does not change when one looks at net profits. BoB and Canara Bank have shown single-digit five-year CAGR of net profits while BoI’s net profit has grown at close to 15% and that of PNB and SBI about 13%. Here again, private and foreign banks have stolen the march over the state-run banks. In the past five years, CAGR of Axis Bank’s net profit is 31%, HDFC Bank’s 26% and that of ICICI Bank is 20.5%. Among foreign banks, CAGR of Citi’s net profit is 26%, HSBC’s 43% and Standard Chartered’s 23%.
On almost all parameters, state-run banks seem to be the laggards. CAGR of deposits for the top five state-run banks varies between 11.02% (SBI) and 15.98% (BoI) and that of advances between 17.23% (Canara Bank) and 24.55% (BoB).
The deposit growth of ICICI Bank, HDFC Bank and Axis Bank has been between 27% and 33% while their loan books have grown between 29% and 44%. Among large foreign banks, Citi and HSBC have grown more aggressively than most of the state-run banks.
Surprisingly, despite their huge branch network that generates retail deposits, the cost of funds for state-run banks is higher than their private sector peers. With interest rates rising, BoB’s cost of fund has gone up from 4.85% to 5.33% in past five years. BoI and PNB are in the same league. SBI’s cost of funds is marginally higher and Canara Bank’s, the highest, rising from 5.19% in 2004 to 6.77% in 2008. Large foreign banks’ fund cost is still less than 5% and ICICI Bank pays the maximum for its funds, among large private banks, but still less than what Canara Bank pays.
Finally, when it comes to return on assets, or RoA, public sector banks are nowhere near the private banks. Citi’s RoA last year was 4.26% and its lowest RoA in the past five years has been 2.79%. HSBC has been maintaining 1.82% and Standard Chartered more than 3% RoA in the past two years. RoAs of Axis Bank, HDFC Bank and ICICI Bank never dropped below 1.09% since 2004 but large public sector banks have not been able to achieve more than 1% RoA too often. SBI’s RoA crossed 1% last year, the first time in the past five years. Similarly, BoB, too, posted more than 1% RoA only once in five years, in 2004. BoI’s RoA crossed 1% in 2008 after a gap of four years and Canara Bank’s RoA has been less than 1% in the past two years. Only PNB has been consistent in offering more than 1% RoA.
RBI’s latest data has burst many a myth about public sector banks’ so-called efficiency and makes it abundantly clear that they have failed to cash in on India’s economic boom in the past few years. Of course, there are reasons behind this, but that’s a different story.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to email@example.com.
Mint’sAshwin Ramarathinam contributed to the numerical analysis.
Also Read Tamal Bandyopadhyay’s earlier columns