Good Q2 for ICICI, SBI but future tense

Good Q2 for ICICI, SBI but future tense

Mumbai / New Delhi: Allaying fears that the global economic slowdown would hurt the Indian banking industry, the country’s top two lenders by assets, State Bank of India (SBI) and ICICI Bank Ltd, posted results for the quarter ended September that beat market expectations.

However, analysts do not expect the party to last long.

The state-owned SBI’s net profit for the second quarter ended 30 September rose 40.23% to Rs2,259.71 crore from Rs1,611.43 crore in the year-ago quarter. ICICI Bank, which has the largest foreign exposure among Indian banks, reported a marginal 1.1% increase in its earnings to Rs1,014 crore from Rs1,003 crore.

Most of the banks that have announced quarterly results so far have reported higher profit despite increased provisions for bad loans. HDFC Bank Ltd, the country’s third largest by assets, posted a 44% jump in profits, while Bank of India’s earnings rose 79.38% and Axis Bank’s, 76%.

Also See One Rises, The Other Falls (Graphic)

Union Bank of India and Canara Bank grew net profits by at least 31%, and Bank of Baroda’s profits rose 21%.

Despite the handsome growth in earnings, analysts are worried about rising bad loans as banks need to make higher provisions to take care of such loans, reducing their profits in coming quarters.

Shares of SBI fell 8.63% to Rs1,056.60 on the Bombay Stock Exchange (BSE) on Monday in a weak market, while those of ICICI Bank recovered from a four-year low of Rs282.15 to close at Rs316.30, up 2.03%.

SBI’s provisions for bad debts rose sharply to Rs911 crore from Rs247 crore, largely due to a government waiver of farmers’ debts, although net non-performing assets (NPAs), or bad loans after accounting for write-offs, fell to 1.34% from 1.42%.

“The slippages are a cause for concern given the economic slowdown," said V.K. Sharma, head of research at Anagram Stockbroking Ltd, a Mumbai-based brokerage. “Going forward, the market is convinced SBI may not be able to get the best out of its other revenue streams."

O.P. Bhatt, SBI’s chairman, said in a statement that net interest margins (NIMs) had risen to 3.16%, but cautioned that this key measure of efficiency would be lower in the next quarter. The bank wants to keep its NIMs above 3%, he added.

As for ICICI Bank, its earnings were dragged by treasury losses and higher provisions, as well as a half-yearly loss at its UK subsidiary after providing for depreciation in its investment portfolio.

“Overall, ICICI Bank’s results are pretty good—quite good in fact," said Vipul Shah, an analyst with KR Choksey Shares and Securities Ltd. “However, net NPAs have gone up, which is a major negative."

The bank’s net NPAs during the quarter rose to 1.91% from 1.43% and its treasury income fell to a loss of Rs153 crore against a Rs175 crore profit earlier.

Excluding treasury income, its core operating profit increased 42% to Rs2,437 crore, and NIM, or net interest income as a percentage of average total assets, rose to 2.4% from 2.2%.

Provisions, other than for tax, surged to Rs923.53 crore from Rs644.49 crore. Provisions for NPAs, excluding those related to the farm-loan waiver, were Rs868 crore.

“More than this quarter, the next quarter will be interesting to look out for because of the overall market sentiment which will affect their CASA (current and savings account) growth," said Shah.

Earlier this month, speculation that the bank’s capital was at stake because of its exposure to troubled US banks such as Lehman Brothers Holdings Inc., prompted the Reserve Bank of India (RBI) to assure depositors that the bank was on sound footing.

On a consolidated basis, ICICI Bank’s net profit for the quarter dropped 27.44% to Rs651.48 crore as its UK arm reported a net loss of $35 million after providing for notional losses on its investment portfolio. SBI did not declare its consolidated earnings.

ICICI Bank’s UK subsidiary had €57 million exposure to Lehman Brothers bonds, for which it set aside $28 million over a $70 million provision related to credit linked notes and other derivatives.

ICICI Bank said it has now exited its non-India linked credit derivatives portfolio at no incremental loss over and above the provisions already held.

It has sold its $600 million non-India linked credit derivatives exposure and has only $1.1 billion in India-linked exposure, joint managing director and chief financial officer Chanda Kochhar said in a conference call.

Another factor that contributed to the bank’s consolidated loss was its life insurance subsidiary, ICICI Prudential Life Insurance Co., a joint venture with UK’s Prudential Plc., which had a loss of Rs466 crore in the first half of this year.

ICICI Bank’s total deposit dropped to Rs2.23 trillion as on 30 September, from Rs2.28 trillion in the year-ago period.

Low-cost CASA deposits as a percentage of total deposits rose to 30% at the end of the quarter, compared with 25% a year ago.

Advances at the end of the second quarter stood at about Rs2.22 trillion from Rs2.07 trillion.

SBI’s CASA marginally rose to 39.71% from 39.45% a year ago. Indian banks are increasingly focusing on CASA to bring down their cost of funds. They pay 3.5% on savings accounts and zero interest on current accounts—two components of CASA. In contrast, the interest rate on one-year term deposit is now around 10.5%.

SBI shares rose 32% in the quarter ended September, outperforming a 4.5% drop in the Sensex, but are down around 30% in October. Shares of ICICI Bank fell 15% in the quarter, and are down more than 40% in October.

Since the start of this calendar year, shares of SBI have fallen 52.77% and those of ICICI Bank, 74.33%. In this period, Sensex has fallen 58.05% while the Bankex, a representative index of banking stocks, has fallen 59.28%.

Narayanan Somasundaram of Reuters contributed to this story.