Mumbai: State-owned banks lagged behind private sector rivals on key financial parameters in the last quarter of fiscal 2008, pressured by a lending-rate cut and high cost of raising capital, as the financial industry braces for a challenging year ahead.
The combined net profit of private banks increased 46.45% to Rs2,553.67 crore during the period.
At public sector banks (PSBs), which control more than 70% of the Indian banking industry, it rose 28.06% to Rs6,442.65 crore.
State Bank of India, the country’s largest state-run lender, accounted for 29.23% of the combined net profit of public sector banks with earnings of Rs1,883.25 crore.
ICICI Bank Ltd, the largest private sector lender, accounted for 45.03% of the combined net profit at non-government banks with Rs1,149.84 crore.
Net interest income, the difference between interest earned and interest paid, a key measure of how banks perform, was also under pressure for public sector lenders, which had to bear the brunt of an interest rate cut.
Net interest income at state-run banks was up a fractional 0.60% from a year earlier, while private banks posted an increase of 39.69%.
Heeding finance minister P. Chidambaram’s call to boost credit growth in the country, most public sector banks pared interest rates by 50 basis points, or half a percentage point, in February. Their counterparts in the private sector did not follow suit.
“Private sector banks enjoyed higher net interest income because they not only had good core business growth but their cost of capital also came down in the year as most of them raised fresh capital in the second quarter,” said Abhijeet Majumder, an analyst with domestic brokerage firm Prabhudas Lilladher.
But private sector banks faced their share of problems, including higher provisioning for overseas derivative bets that soured. During the quarter, ICICI Bank made a provision of $260 million (about Rs1,115 crore) for mark-to-market losses on its exposure to overseas derivative products, while Axis Bank Ltd set aside Rs76 crore and Kotak Mahindra Bank Ltd Rs86 crore.
Mark to market is an accounting practice of assigning a value to a position held in a financial instrument, based on the current market price. Public sector banks had largely stayed away from such exotic overseas derivatives deals.
Overall, the combined net profit for banks increased 32.79% in the quarter, slowing from 42.58% in the preceding three months. Combined net interest income rose 9.28%, the slowest during the year.
The current year, analysts said, will be more challenging for banks. With the implementation of the so-called Basel II norms, an accounting standard adopted by the Bank for International Settlements, lenders would have to maintain a higher level of capital to cover riskier asset classes.
Bank would also have to brace for a higher provisioning standard prescribed by the Reserve Bank of India for their off-balance sheet deals such as interest-rate and foreign-exchange derivative transactions, and have to cope with a tougher interest-rate environment amid higher inflation.
“Inflationary pressures and high interest rates may send loan growth below 20%,” said Ambreesh Srivastava, senior director, Fitch Ratings.