The third quarter FY10 earnings of most of the banks under our coverage were in line with expectations with the divergence from the estimates being +2% in case of public sector banks and +5% for private sector banks.
The earnings for the quarter were largely driven by sequential improvement in the net interest margin (NIM), growth in advances and controlled operating expenses.
On the net interest income (NII) front, state-owned banks performed slightly better than expected though the y-o-y growth at aggregate level (11% y-o-y) was lower than their private sector peers (who posted a 15% y-o-y growth). The slight outperformance by public banks in terms of NII was driven by better NIM in the quarter.
All banks under our coverage registered an expansion in their NIM during the quarter. The expansion was driven by a significant reduction in the cost of funds (as bulk deposits got re-priced at lower rates) and better deployment pace due to reversal in credit growth trend.
Falling in line with our expectations, treasury gains were limited during the quarter owing to firm bond yields. At aggregate level, public banks saw their treasury gains fall by 47% y-o-y against a 91% y-o-y decline witnessed by private banks. Consequently, the treasury gains contribution to the profit before tax came down to 13.7% for public sector banks, which is significantly higher than the 3.3% contribution in case of private sector operators.
On the other hand, the fee income for public banks was a mixed trend where Punjab National Bank (PNB) and Bank of India (BoI) reported low to negative growth in their fee income, other banks saw their fee income grow at a steady pace during the quarter. In case of private sector banks, the fee income growth was in the range of 5-30%.
The improvement in the core performance was largely driven by a sequential rise in margins as well as controlled operating expenses. Private banks performed better as their pre-provisioning profit (ex-treasury) grew by a strong 38% y-o-y against 11% y-o-y growth posted by public banks.
The asset quality trend during the quarter surprised us negatively as the gross non-performing asset (GNPA) of public banks increased by 11% sequentially. Charting a completely different trend, private sector banks saw an improvement in their asset quality with aggregate GNPA decreasing by 2.3% on a sequential basis.