The CEO of a public sector bank is very upset with last week’s column that spoke about lazy banking. He called up to say public sector bankers are not “lazy”; they are “prudent”. “With so much of uncertainties all around, would you like us to aggressively lend? We would rather wait and watch. If the situation improves after a few months and borrowers start taking loans, where would we get money to lend unless we have a solid deposit base? Do you want us to raise money from the overnight market and lend to customers?” he asked. Last week I wondered why banks would need to pay high interest rates to collect deposits when they are not lending.
Another gentleman, a senior analyst with a foreign brokerage, however, liked the piece for highlighting “public sector bank’s passion for deposits”. “Whether they need the money or not is not important. They need to fulfil the year-end target of deposit mobilization. I will not be surprised if they pay more (interest) to gather maximum deposits in the last two months of the fiscal year,” he said.
This analyst asked me to take a close look at the banks’ performance in the first nine months of the current fiscal. The highly agitated CEO too asked me to do the same. “Take a look at our performance. You will see how the lazy bankers are doing,” he told me with a lot of sarcasm.
Interest income of 21 listed public sector banks for which the comparative data are available has risen by 30.25% in the third quarter of fiscal 2008, ending December. Eighteen listed private banks, old and new, in contrast, have recorded more than 47% raise in their interest income, although on a lower base. Yes Bank Ltd and Kotak Mahindra Bank Ltd, the newest Indian private banks, have registered 113% and 91% raise in their interest income in the third quarter, respectively. Among others, Centurion Bank of Punjab Ltd’s interest income rose more than 76%. HDFC Bank Ltd’s interest income rose by 60.51%; Axis Bank Ltd’s close to 55% and that of ICICI Bank Ltd, India’s largest private sector lender, 41%. In contrast, State Bank of India’s interest income rose 34%. Among other large banks in the public sector, Punjab National Bank’s interest income rose by 26.63%, Bank of Baroda’s 28.60% and that of Canara Bank by 20%. Bank of India has done the best, recording close to 40% rise in interest income.
Interestingly, most of the private banks have surpassed their entire fiscal 2007 interest income in the first nine months of fiscal 2008, unlike any public sector bank.
When it comes to “other income”, that includes treasury income as well as fee and commissions, public sector banks have not done badly. State Bank of India’s other income grew 48% and that of Bank of Baroda, Bank of India and Canara Bank by 85%, 72% and 92%, respectively. In the pack of private banks, other income of both Kotak Mahindra Bank and Yes Bank in the third quarter rose by more than 100% while HDFC Bank registered 82% and Axis Bank 74% growth. Here again, most private banks have been able to cover their other income of 2007 in first nine months of fiscal 2008.
Five private banks—Axis Bank, Centurion Bank of Punjab, Ing Vysya Bank Ltd, Kotak Mahindra Bank and Yes Bank—have shown more than 100% rise in their operating profits in the quarter and over all the private banks’ operating profit grew by close to 49%. Among large public sector banks, State Bank of India, Bank of India and Bank of Baroda have recorded 55% while the average is much lower, around 32%. Despite this, public sector banks’ average net profit growth in the third quarter was at least 41% against private banks’ 47%. Bank of India’s net profit grew by 101% and that of State Bank of India’s 70%. The net profits of State Bank of India, Bank of India and Bank of Baroda in the first nine months of fiscal 2008 have exceeded the net profits of the entire last fiscal year.
How did these banks manage to post higher net profits despite a modest growth in operating profits? Well, this was possible because of a drastic reduction in provisions made by them. Banks are required to keep money aside to provide for their stressed assets. Since most of the stressed assets accumulated in the past have already been provided for and there are not too many instances of fresh bad assets, banks have brought down their provisions this year. For instance, State Bank of India, which had made Rs5,422.34 crore of provisions in 2007, has provided for only Rs1,049.51 crore in the first nine months of 2008. Similarly, ICICI Bank has made provisions worth Rs1,857 crore in the nine months of this fiscal against Rs6,282 crore last year.
Overall, these banks’ provisions and contingencies stood at Rs9,887,89 crore in the first nine months of this year. This is 7% higher than provisions made in the corresponding period of last year but only about 30% of what they had provided for in the entire last year. If there is a slowdown in industrial activities and the borrowers start defaulting in meeting their payment obligations, banks will have to rush to step up their provisions and this will eat away their net profits. Busy bankers should be proactive in detecting the first sign of stress in their assets and start providing for them if they want to avoid any unpleasant surprise for their bottom line.
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.