The CEO of a public sector bank has asked me to curb my irrational exuberance on the declining distressed assets of the Indian banking sector. He was reacting to my last week’s column that spoke about the growing membership of the zero-net NPA (non-performing assets) club in the industry.
“It’s too early to celebrate,” he warned. “Banks may not be hiding distressed assets under the carpet, but the chances of such assets growing in volume is strong given their aggression in disbursing retail loans.”
Meanwhile, a banking analyst with a domestic brokerage is even more straightforward. In an email, he expressed dismay at my failure to appreciate the real scenario and accused me of misguiding naïve investors by presenting a distorted picture of Indian banks’ health.
So, why don’t we go beyond distressed assets and take a close look at the profit and loss account of the industry?
Except for the Delhi-based Punjab and Sind Bank, all public sector banks have announced their financial results for 2006-07. Similarly, all new private banks as well as older private banks have also announced their audited results. Barring two of them—Central Bank of India in Mumbai and United Bank of India in Kolkata—all are listed entities.
Collectively, these 44 banks have announced a growth of more than 24% in their net profit. The comparative figure in the previous year was close to 12%. This means their net profit growth has more than doubled despite successive hikes in interest rate and tightening of liquidity during the year. Their operating profit, a better measure to judge their performance, has grown by more than 17% against just about 4% in 2005-06. One of the reasons for the high net profit growth could be lower provisions made for distressed assets. Indeed, provisions made by the entire industry during the year rose by even less than a quarter of a percentage point. But in the previous year, these banks’ overall provisions actually dipped by over 10%. So, one really cannot say that they have depressed their provisions to show an inflated net profit.
In their aggressiveness to mobilize resources, banks have paid higher interest on deposits—reflected in the huge rise in their cost of interest payment. However, their interest income, too, rose to match that. And other income, consisting of treasury income as well as fees and commission on banking services, rose 6% rise against a marginal fall the previous year. With bond yields up, banks we-re not able to make much money from their debt portfolio, but that was compensated to a large extent by equity trading.
Within the industry, private banks have put up a better performance versus their counterparts in the state sector. Collectively, their net profit has grown by close to 34% versus 21% of the state-run banks. South Indian Bank has doubled its net profit while Bank of Rajasthan’s net profit grew six times and that of ING Vysya Bank close to nine times. Development Credit Bank, in the red for last few years, is back in the black. In the public sector, Bank of Maharashtra’s net profit grew over four times, Dena Bank’s almost two times and Vijaya Bank’s one-and-a-half times while State Bank of Bikaner and Jaipur’s net profit has doubled. Only five state-run banks have shown single-digit growth in their net profits. They are State Bank of India (SBI), Oriental Bank of Commerce, Canara Bank, Allahabad Bank and Punjab National Bank. Among private banks, only Karnataka Bank has shown a flat bottomline.
When it comes to operating profit, the picture is not that rosy. Except for Bank of Rajasthan and ING Vysya Bank, none has shown over 100% growth in their operating profits. In fact, IndusInd Bank in the private sector and SBI and its associate bank State Bank of Saurashtra among public sector banks have shown a decline in their operating profits. Despite that, they have been able to register higher net profit on account of lower provisions.
Overall, public sector banks have shown a 12.5% drop in their provisions while private banks have made over 71% higher provisions. Private banks are also ahead of the state-run banks when it comes to treasury and fee-based income. Their ‘other income’ has gone up by more than 38% while public sector banks have shown a 5% dip in this income stream. In the previous year, the fall was even sharper.
So, overall, it’s a pretty good showing, particularly against muted market expectations. The results were also an emphatic answer to the Cassandras who were expecting many banks to crumble under the pressure of rising rates and tightening liquidity. Now, the stock market is re-rating the sector as the players have shown resilience in tiding over difficulties.
However, as the CEO of the public sector bank told me, it’s too early to celebrate. He is right in one sense. The biggest challenge for the industry will be raising capital to support the growth in assets as well as meet the international norms of capital requirement. ICICI Bank Ltd is set to raise more than $4 billion from market next month; HDFC Bank Ltd, too, plans to enter the market besides raising money from its parent Housing Development Finance Corp. SBI has also announced its plan to tap the market for funds, though it has given no timeframe as yet. Others too will need fresh capital if they are to grow and maintain their profitability.
The next game of the Indian banking industry will be played on the capital market. Which is why it is extremely important for banks to convince the market of their abilities. Until now, they have been reasonably successful in doing so. The movement of their stocks bears testimony to this.
(Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to firstname.lastname@example.org)