Results declared by India’s public sector banks and their private-sector counterparts may show that the former are far ahead of the latter in terms of growing net profits, but a close look at the numbers shows that they have been able to achieve this by making lower provisions for bad loans.
The 15 public sector banks that have announced their results for 2006-07 have shown a 38.32% rise in their net profits. The corresponding number for their five private sector peers that have declared results until now is 27.66%.
The public sector banks under review have made Rs5,876.30 crore worth of provisions in 2006-07, down 8.71% from the Rs6,436.88 crore they provided for in 2005-06. In contrast, the five private banks have raised their provisions by 107%, from Rs1,881.62 crore in 2005-06 to Rs3,893.11 crore in 2007. This has happened at a time when banks have been aggressively growing their credit portfolios by lending to both companies and individuals. Had the public sector banks made equally aggressive provisions, their net profits would not have risen so sharply.
Following their aggressive provisions for non-performing assets or NPAs (banker lingo for bad loans), four out of five private banks that have announced their results thus far have become zero NPA banks. In contrast, four out of the 15 public sector banks turned into zero NPA banks in 2007.
These 20 banks represent roughly 50% of the universe of listed banks in India and account for about 59% of the total market capitalization of all listed banking entities.
The total market capitalization of all the 39 listed banks was Rs3,25,092.07 crore on 30 April.
“The trend is very clear. Private banks are busy cleaning up their balance sheets at the cost of profitability. They may be showing depressed bottomline, but investors should not feel disappointed as lower NPAs strengthen the balance sheets,” says a banking analyst with a foreign brokerage who did not wish to be named.
The list of private banks that has announced results includes ICICI Bank, HDFC Bank and UTI Bank. The public sector banks’ list includes two large banks—Bank of India and Bank of Baroda. Punjab National Bank, Canara Bank, and India’s largest commercial bank, State Bank of India, are yet to announce their results.
The interest income of the five private banks rose by 59.16% to Rs36,007.91 crore. Yes Bank lead the pack with a 204.77% rise in interest income on a very low base of Rs192.80 crore. ICICI Bank posted a 60.73% rise in interest income to Rs22,994.29 crore. Two other private banks, HDFC Bank and UTI Bank, have shown more than 50% rise in their interest income.
The public sector banks have collectively registered a 26.12 % rise in their interest income to Rs66,889.33 crore. State Bank of Mysore topped the list with a 34.08% rise, followed by Indian Overseas Bank (32.36%) and Bank of Baroda (30.68%).
The public sector banks are also lagging behind their private sector counterparts when it comes to other income that includes fee-based income and income arising out of bond trading.
In fact, eight of the 15 public sector banks have registered a drop in their other income. The average other income of the public sector banks has gone up by 3.69% against more than 41% rise in other income of private banks.
Among private banks, South Indian Bank’s net rose by 104.56% and that of Yes Bank, 70.57%. Among the public sector banks, Bank of Maharashtra posted a net profit growth of more than 400%, Dena Bank more than 175% and Vijaya Bank more than 160%.
ICICI Bank has made the highest provision of Rs2,226.36 crore and HDFC Bank Rs1,166.25 crore to bring down their net NPAs to zero. Among the public sector banks, Bank of India has made a provision in excess of Rs1,100 crore, but in percentage terms this is only 7.48% higher than what the bank had provided for last year. In case of ICICI Bank, provisions went up by more than 180%; and in HDFC Bank’s case, by more than 60%.