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Operating profit growth lowest in five quarters

Operating profit growth lowest in five quarters
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First Published: Sun, May 25 2008. 11 58 PM IST

Updated: Sun, May 25 2008. 11 58 PM IST
Mumbai: The fourth quarter of the last fiscal year that ended on 31 March was the worst for Indian banking in recent times, with the growth in operating profits of 17 listed banks that constitute Bankex, the banking index of the Bombay Stock Exchange, dropping to a five-quarter low.
A Mint analysis of the financial results of these banks shows the growth in operating profits of these banks fell sharply to 22.52% in March on quarter-on-quarter basis. In the third quarter, their operating profits grew 41.49%.
Operating profit reflects the core strength of a bank. The net profit of a bank is arrived at after deducting corporate tax and provisions made for non-performing assets, or NPAs, from operating profit. It means that even after posting a relatively low operating profit, a bank can still show higher net profit if it does not provide enough for sticky assets.
In fact, the drop in net profit growth of these banks was not as sharp as the drop in the growth of operating profits. Their net profits during the March quarter grew close to 36%, lower than 44.28% net profit growth in the third quarter because of lower provisioning. In the fourth quarter, these banks’ provisions grew by 11.93%, sharply lower than 22.03% growth in provisions in the December quarter.
The fourth quarter is normally the best quarter for banks as business gathers momentum in the second half of a fiscal year, particularly in the last quarter, when credit offtake increases. However, it has been a very different fourth quarter, with slackening credit growth.
A few public sector banks also pared lending rates. At the same time, some raised deposit rates during the quarter to attract higher deposits. It essentially means their interest income was dented due to lower credit growth, while the cost of funds increased.
In fact, on the line of operating profit growth, the growth in interest income of these banks in the fourth quarter has also been the lowest in the past five quarters. Their interest income during the quarter grew 29.52%, while in the previous four quarters, the growth in this segment varied between 35.11% and 37.32%. Data also shows that the growth rate in banks’ net interest income in the fourth quarter of 13.20% was at a five-quarter low. During this quarter, the Bankex fell 32.95%, while the Sensex, the benchmark index of the Bombay Stock Exchange, fell 22.94%. Since the beginning of the fiscal year, however, the Bankex has gained 6.39%. This is in line with the Sensex’s gain of 6.55% between 1 April and 23 May.
Recently, Bank of Baroda chief M.D. Mallya said overall the fourth quarter was bad for public sector banks as they lowered lending rates at a time when credit offtake was slowing and monetary measures were tightened.
In its fight against inflation, the Reserve Bank of India in March hiked the cash reserve ratio, or the money banks have to keep with the central bank, by 75 basis points to 8.25%. One basis point is one-hundredth of a percentage point.
According to a research report of Asit C. Mehta Investment Interrmediates Ltd, the banks’ margins were under pressure due to high interests on bulk deposits. “This year, banks had offered high interest rates for bulk deposits. With high rates being offered, the deposits grew 22.2% (year-on-year) in March, at par with advances at 22.3%. Reduction in the low-cost deposits has put further pressure on the margins,” noted Deepti Chauhan, the writer of the report.
“Lending rates and borrowing costs have risen over the past 9-12 months, triggered by tightening money supply and RBI’s policies. The higher rate environment has begun to hurt the banks — credit growth has decelerated sharply and margin pressure appears likely,” she added.
According to another analyst who does not wish to be named, the banks also did not profit much from government securities as yields were high. “To counter it, banks concentrated on their fee income, the profits of which remained stable, and in some cases, increased,” he said.
Although calendar year 2007 was good as far as treasury income was concerned and banks’ income from equities zoomed, the March quarter was particularly bad as the equities market slumped on concerns of a global recession.
Enam Securities Pvt. Ltd, in a recent research report, says net profit growth for state-owned banks was strong despite moderate growth in net interest income—in many cases due to low growth in operating expenses and reduced provisioning.
“Provisioning for many banks declined on year-on-year basis largely due to writeback of excess provision and lower provisioning on NPAs,” says the report, authored by analysts Punit Srivastava, Aditi Thapliyal and Rajiv Pathak.
“State Bank of India, Union Bank, Canara Bank, etc., took a one-time hit on their reserves while adopting the new AS-15 norms. Some banks such as Bank of India, Bank of Baroda have been amortizing the hit over a period of five years,” the report said.
AS-15 is an accounting norm that deals with providing for retirement expenses. Banks can either provide for it in one go from their reserves, or spread it over five years.
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First Published: Sun, May 25 2008. 11 58 PM IST