Low RoA, provisions hurt banks

Low RoA, provisions hurt banks
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First Published: Thu, Nov 29 2007. 01 00 AM IST

Updated: Thu, Nov 29 2007. 01 00 AM IST
How do Indian banks compare with their peers in other countries? According to the Reserve Bank of India (RBI) report Trend and Progress of Banking in India, Indian banks’ return on assets (RoA) in fiscal 2007, at 0.9%, was well below that of banks in Latin America.
Banks in Argentina and Brazil had an RoA of 2.1% and banks in Mexico 3.2%. Korean and South African banks, too, had higher RoA, at 1.1% and 1.4%, respectively. The surprise lies in the measly profitability of banks in the developed markets. Japanese and UK banks had an RoA of 0.4% and 0.5%, respectively, although the data is of 2006. In contrast, US banks’ RoA in 2007 was 1.2%. However, that must be seen against the backdrop of the huge losses likely to be incurred by banks in developed countries in the current year. Clearly, a large part of the profits of US and, indeed, of European banks, was unsustainable.
That caveat needs to be kept in mind when comparing the non-performing assets (NPAs) of Indian banks with that of other banks. As at end-March, the ratio of gross NPAs to gross advances was 2.5% for Indian scheduled commercial banks, compared with 0.8% in the US, 0.9% in the UK and 2.5% for Japan (the data for Japan is of March 2006).
Banks in Argentina and Brazil had higher non-performing loan (NPL) ratios than Indian banks, at 3.2% and 4%. The Achilles’ heel of Indian banks, however, lies in their low provisions-NPL ratio—this was 56.1% for all scheduled commercial banks in March 2007. The new private banks had the worst ratio of 49.1%. In contrast, US banks had a provision-NPL ratio of 129.9%, which will stand them in good stead as NPAs rise. The provisions-NPA ratio for Brazilian banks was 153% and for Korea 177.7%. The ratio for UK and Japanese banks was abysmal, at 56.1% (2005 data) and 30.3%.
With advances to the volatile real estate sector being as high as 32.3% of total loans and advances of the new private banks, it’s time they increased their loan provisions.
Colgate’s largesse
Colgate-Palmolive (India) Ltd, market leader in the oral care space, continues to be liberal with its dividend payouts. It announced an interim dividend of Rs6 per share on Monday for the current fiscal, on the back of a hefty dividend of Rs9.50 in fiscal 2007. In the past 10 financial years, Colgate has paid out dividends of Rs55.75 per share, which amounts to 83% of its earnings during the same period. Even after excluding special anniversary dividends, payouts in the last 10 years exceeded 70% of the earnings during the period. That’s not all. Earlier this year, the company reduced its paid-up share capital by paying back Rs9 per share to each shareholder.
While Indian subsidiaries of multinational companies are known to pay high dividends, Colgate’s generous payouts have surprised the markets.
When it announced the share capital reduction plan in May, its shares jumped 13%. The interim dividend announcement led to a 4% rise in share price on Tuesday. Colgate shares corrected on Wednesday, ahead of a suspension in trading on account of the reduction in share capital.
At current prices, Colgate trades at 20.6 times trailing earnings—among the lowest in recent times. Despite their rise after the payouts, the company’s shares are about 16% lower compared with the highs reached last April.
The lack of interest in Colgate lately is understandable, given the gravitation towards high-growth stocks, such as those in the capital goods sector. Colgate, on the other hand, is growing earnings at sub-20% levels. Operating profit before advertisement expenses, or what the company terms operating contribution, rose 19% in the first six months of the current fiscal. In fiscal 2007, contribution had risen a mere 12%. While the stock can be expected to grow with earnings at a similar steady pace going forward, the current price-earnings (P-E) multiple more or less captures the estimated growth.
Write to us at marktomarket@livemint.com
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First Published: Thu, Nov 29 2007. 01 00 AM IST