Mumbai: One industry that has not been affected by the economic slowdown yet is banking.
Riding high on treasury income, the 18 banks that constitute the Bombay Stock Exchange’s (BSE) banking index, the Bankex, collectively increased net profits by 41.19% in the December quarter, the highest in past four quarters.
In absolute terms, the net profit of these lenders—10 public sector and eight private banks—climbed to Rs10,580.63 crore in the three months to December from Rs7,493.73 crore a year ago. But this may not last for long as analysts fear banks will start piling up stressed assets in next few quarters.
Higher non-performing assets dent banks’ profitability as they need to make provisions for such assets.
In December quarter, the Bankex fell 15.81% to 5,454.54 points, while the benchmark index, the Sensex, fell nearly 25% to 12,860.43 points.
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These banks gained as they reversed mark-to-market, or MTM, provisions, but stripped of this and treasury income, net profits would be significantly lower, according to several analysts. MTM is an accounting practice of valuing a financial asset according to its market price and not the cost at which it was bought.
Early this fiscal year when interest rate was rising, banks had to book MTM losses on their bond portfolio as bond yields rose and prices dropped.
In the quarter ending December, the scenario changed with bond prices rising and yields dropping.
Yields on the 10-year bond fell to about 5% in December as the Reserve Bank of India (RBI) cut key policy rates, thereby pushing up prices. Bond yields and prices move in opposite directions.
Yields on the 10-year government paper fell to an all-time low of 4.86% in intra-day trade in January after RBI lowered its key rates further.
Many banks had incurred huge notional losses on their bond portfolio when the yields were rising earlier till at least September.
Since October, RBI has reduced its repo rate, or the rate at which it infuses liquidity into the system, by 350 basis points, and the reverse repo rate, or the rate at which it sucks out liquidity, by 200 basis points. RBI also slashed the cash reserve ratio, or the deposits banks have to park with it, by 400 basis points. One basis point is a hundredth of a percentage point.
“Banks’ profitability boost in the third quarter was on the back of high trading gain. Excluding that, banks’ profitability will be significantly low,” said Saikiran Pulavarthy, an analyst with Centrum Stock Broking Pvt. Ltd, a Mumbai-based brokerage. “Another interesting factor to look out for in the quarter was banks’ net interest margin expansion.”
With the yields on the 10-year bond falling, treasury income for the Bankex constituents rose to Rs32,141.82 crore from Rs15,897.91 a year ago. But year-on-year growth in interest income, or core revenue for banks, slowed to 34.1% during the quarter from 37.83% in the preceding quarter.
Apart from the treasury gains, another contributing factor to these banks’ soaring profits has been lower provisions and contingencies. The Bankex lenders trimmed their provisions and contingencies in the December quarter to Rs3,593.16 crore from Rs4,289.45 crore in the September quarter and Rs5,864.19 crore in the three months to March.
Net interest margins, the difference between interest earned and interest expended, too expanded healthily.
The average net interest margin moved up to a comfortable 3%, but bankers don’t expect such levels to be sustainable.
“Net interest margins will fall going forward, but if we can manage to maintain net interest margin at 2.8%, we will be happy,” said a senior official at the public sector Union Bank of India.
Union Bank’s net interest margin in the December quarter rose by 52 basis points year-on-year to 3.2%, and by 21 basis points from its September quarter.
Among the Bankex lenders, Federal Bank Ltd was the top performer in the October-December period. Its net interest income rose 88.8% to Rs384.59 crore from a year ago, while adjusted net profit increased 98.11% to Rs203.89 crore.
Yes Bank Ltd, another private sector lender, saw its interest income grow 32% to Rs120.41 crore and its adjusted net profit, rise 95.04% to Rs105.79 crore.
Among public sector banks, Punjab National Bank was the best performer and third overall among Bankex lenders. Its adjusted net profit grew by 85.76% to Rs330.84 crore in the December quarter.
Graphics by Sandeep Bhatnagar / Mint