ICICI Bank Ltd recorded an excellent net profit growth of 39% in the March quarter, despite the increase in total income (net interest income plus non-interest income) being a much lower 20%.
This feat was achieved by limiting growth in total expenses. One reason for the slower growth in expenses is that employee cost in the fourth quarter was 18% lower than in the third quarter — that’s a substantial pruning of the wage bill.
As a matter of fact, the wage bill for the March quarter is the lowest for any quarter of FY08. At the analyst conference, ICICI Bank chief executive K.V. Kamath explained it by saying, “We have cut the bench,” referring to the tradition of keeping employees ‘on the bench’ or on the sidelines waiting to be deployed as business expands or as other employees leave.
Further, expenses on direct marketing agents were 15% lower than in the year-ago period—the bank’s decision to originate non-priority sector home loans from its subsidiary ICICI Home Finance Co. Ltd has enabled the bank to reduce expenses on direct marketing agents. With some home loans being booked in the subsidiary, margins have improved at the bank.
The net interest margin improved a tad to 2.4% in the March quarter, compared with 2.3% in the December quarter. However, the cost to income ratio, excluding the expenses on marketing agents, went up to 39.7% in the fourth quarter, compared with 38.3% in the third quarter.
Growth in advances slowed during the fourth quarter, with year-on-year growth at 15.2% at the end of March 2008, against a growth rate of 24.7% at the end of December. That has translated into slightly slower growth in net interest income. Non-interest income was lower, primarily because of a sharp fall in treasury income.
Retail advances actually contracted during the fourth quarter, though the rise in advances from the bank’s overseas branches continued to be very strong. In future, Kamath sees the corporate side of the business as the main growth driver.
Deposit growth too slackened to a mere 6% year-on-year by March-end, from 16.7% at end-December. Low-cost current and savings bank accounts constituted 26% of total deposits, against 27% at end-December.
Gross non-performing assets (NPAs) were worth Rs8,350 crore at March-end compared with Rs7,246 crore at end-December. A bank official put it down to a “rise in the proportion of uncollateralized portfolios”, possibly alluding to credit card losses. But write-offs and provisions were higher and the net NPA ratio moved up very slightly to 1.49% from 1.47% at end-December. There were no surprises on the mark-to-market losses, provisions for which amounted to $100 million in the fourth quarter.
Unfortunately, there are headwinds for the bank’s subsidiaries too.
The life insurance business has seen a slowdown in March, primarily because much of it is unit-linked and therefore is susceptible to the market downturn.
A similar slowdown is seen in the asset management company and in ICICI Securities Ltd. The management is in no hurry to list ICICI Securities and won’t do so under current market conditions.
Profits from the general insurance business have been hit by price deregulation. But private equity continues to do very well.
In sum, while net profit growth has been good in the March quarter, the underlying trends are not very comforting. Kamath, however, believes that with a total capex investment pipeline of an estimated $700 billion by corporates and the government, banks should have plenty of opportunities for growth.
Dismal results from SBI’s associates
What has happened to the associate banks of State Bank of India? Those of them that have published their results have all fared badly during the fourth quarter.
State Bank of Mysore’s net profits have been flat in the March quarter and net interest income growth was a tepid 6% year-on-year. Provisions too have increased substantially.
State Bank of Travancore’s net profit rose by all of 6%. In fact, profits before tax and provisions was actually lower than in the year-ago period, while net interest income was lower by 21%.
State Bank of Bikaner and Jaipur also posted a lower profit after tax in the fourth quarter than in the year-ago period, hit by much lower net interest income although its “other income” improved substantially. Provisions too were much higher.
State Bank of Hyderabad too saw a dip in net profit by 6.7% in the quarter. State Bank of Indore’s net profits for the March quarter were 21% lower than for the year ago period.
As a matter of fact, many public sector banks that have declared their results so far have shown a dip in profit, primarily because net interest income has been lower than in the year-ago period.
Even those that have shown profit growth, such as Oriental Bank of Commerce or Corporation Bank, have seen lower or flat net interest income in the fourth quarter.
The trend in net interest income (NII) was not unexpected, given the pressure to lower prime lending rates and given the slow credit offtake.
A preview of banking results by broking firm Sharekhan points out, “The expectation of a flattish NIM (net interest margin), sequentially coupled with continued moderation in the credit offtake, implies likely pressure on the net interest income growth. Also, the year-ago quarter included the one-time income of the interest on the cash reserve ratio (CRR) balance with the Reserve Bank of India for nine months. The absence of this income in Q4FY2008 further contributes to our outlook of a muted NII growth on y-o-y basis.”
The dismal performance of its associate banks doesn’t portend well for the result of State Bank of India.
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