The common thread that binds most public sector bank results in the fourth quarter (Q4), apart from the ubiquitous interest rate scenario, is pension liabilities.
Sure, it is a one-time charge for lenders, with the Reserve Bank of India (RBI) asking them to provide for the entire pension liability for retired employees in Q4. Punjab National Bank’s (PNB) numbers were no exception and suffered from this one-time charge.
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Pension and wage revision expenses rose nine times in Q4 compared with a year ago. Consequently, operating expenses increased 51.5%. That took away the sheen from PNB’s core numbers, which were not exceptional when compared with similar-sized public lenders such as Bank of Baroda and Bank of India.
PNB’s net interest income, the difference between interest earned and interest paid, gained a reasonable 22.4% from a year ago. Fee income grew at a reasonable 19.5%.
However, the strong increase in operating expenses meant that operating profit grew 7.5%.
Unlike some private sector banks, which were able to reduce bad or doubtful assets and cut provisioning, the lender had to set aside more money for bad debts, too. Net non-performing loans as a percentage of net customer advances increased to 0.85% at the end of March, higher than a quarter ago. That meant that net profit grew 5.8% from March 2010.
The pension liabilities blow couldn’t have come at a worse time, as banks are struggling to sustain margins and profitability in a rising interest rate environment.
PNB’s net interest margin (NIM)—the spread earned by a bank on interest-bearing assets—fell to 3.91% in Q4, compared with 4.13% in Q3.
Things are only going to get worse after RBI’s 50 basis points hike in both the policy and savings account rates on Wednesday. The bank itself has guided for an NIM of 3.5% in the current fiscal. It has passed on the rate increase to customers immediately. One basis point is one-hundredth of a percentage point.
But the question is how long can PNB go on increasing rates at a time when credit growth is slowing. Outstanding advances at the end of March increased 9.4% sequentially and 29% from a year ago. That, though it reflects the slowdown in the system as well, will be a key factor in determining whether PNB will be able to break away from the pack.
Graphic by Yogesh Kumar/Mint
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