Banker’s Trust: Won’t be a smooth ride for all banks

Banker’s Trust: Won’t be a smooth ride for all banks

At least one public sector bank and four State Bank of India (SBI) associates have recorded a decline in their net profits in the July-September quarter of fiscal 2008. The net profit growth of another five state-run banks has been in single digits. Even though bank stocks are enjoying a dream run on the bourses with the Bombay Stock Exchange’s banking index, Bankex, outperforming the benchmark index, Sensex, in the July-September quarter, everything is not rosy for India’s banks, particularly the state-run ones.

Oriental Bank of Commerce’s net profit for the quarter is Rs221.58 crore, down from Rs262.47 crore in the corresponding quarter of the previous year. The decline is even sharper for some SBI associates. For instance, State Bank of Saurashtra’s net profit has almost halved—from Rs37.02 crore to Rs18.47 crore. State Bank of Travancore’s net profit has dropped from Rs82.70 crore to Rs66.81 crore and that of State Bank of Patiala, from Rs70.05 crore to Rs50.70 crore.

The list of state-run banks that have shown very modest growth includes Vijaya Bank (net profit rose by 2.85%), State Bank of Indore (2.92%), Andhra Bank (3.26%), Punjab National Bank (6.63%) and Uco Bank (9.78%).

There are some pockets of sparkling performance. For instance, Bank of India has posted more than 100% growth in its net profit, Rs425.27 crore against Rs212.13 crore. Indian Bank’s net profit has grown more than 46% and that of Union Bank of India, 42%.

Bank of Maharashtra has reported more than 47% growth (from Rs61.29 crore to Rs90.45 crore) and State Bank of Mysore 53.5% growth (from Rs59.40 crore to Rs91.18 crore).

Boosted by high treasury income, SBI has registered 36% growth in its net profit. Overall, the public-sector banking industry’s net profit in the July-September quarter has risen on an average by 21.66%.

This is half of the growth rate that new generation private banks have shown. On a smaller base, Kotak Mahindra Bank Ltd and Yes Bank Ltd have posted 117% and 111% net profit growth respectively. ICICI Bank Ltd, the largest lender in the private sector and India’s most valuable bank in terms of market capitalization, has posted 32.79% growth in net profit to Rs1,002.60 crore; HDFC Bank Ltd’s net profit has risen by more than 40% and that of Axis Bank Ltd by more than 60%.

The public-sector banking industry’s net profit would have been further depressed but for the fact that these banks have provided less in this quarter to take care of their sticky assets. Overall, the average growth in provisioning is only 12%. In contrast, new private banks’ provisioning has jumped by more than 47%.

This explains why public sector banks could manage to show more than 21% growth in net profit despite a measly 9.58% growth in their operating profit. Had they been liberal in providing for bad assets, their net profit growth would have looked far less respectable.

Out of 25 public sector banks studied here (quarterly results of Central Bank, United Bank of India and Punjab & Sind Bank are not available yet), only 12 banks have posted double-digit growth in their operating profits and others have shown either single-digit growth or decline. New private banks’ average operating profit has grown by more than 40.5%.

The main reason behind the lacklustre performance by the public sector banks is a slowdown in credit growth and their interest income. The average growth in interest income for the public sector banks is 31.89% and only four of them have shown more than 40% growth. In contrast, except for IndusInd Bank Ltd, all new private banks have shown more than 40% growth in interest income and their average growth is more than 51%. Here again, Yes Bank and Kotak Mahindra have registered more than 100% growth, on a small base though. ICICI Bank’s interest income has grown close to 44% and that of HDFC Bank, more than 75%.

Bank credit till October end has grown by Rs96,966 crore or 5% against Rs1.47 trillion (9.8%) in April-October last year. On a year-on-year basis, bank credit has grown by Rs3.72 trillion or 22.5% against Rs3.67 trillion or 28.5%. While credit growth is slowing down, banks’ deposit portfolios have been growing at a very healthy pace. Since the beginning of the fiscal, bank deposits have grown by Rs2.70 trillion (10.3%) against Rs1.78 trillion (8.4%) last year. On a year-on-year basis, bank deposits have grown by Rs5.91 trillion (25.8%) against Rs3.73 trillion (19.5%).

Anticipating huge credit growth, banks had offered high rates to woo depositors and, in the process, increased their cost of funds. But in the absence of credit demand, banks have lost the power to price the loans and hence, apart from a slowdown in interest income, their net interest margin—the difference between the cost of deposits and earnings on loans—has also been squeezed. There is yet another bad omen: the rising sticky assets. Stressed assets in the retail segment have been growing and banks will find it increasingly difficult to recover bad loans as a few overzealous recovery agents have spoilt the party by resorting to strong-arm tactics. The banking regulator is not happy with the industry on this count and this will encourage loan defaulters to find fault with every recovery agent and even stall the process. So, banks’ provisioning requirement will rise.

It will not be a smooth ride for all banks in the world’s second fastest growing economy and the stock market will surely distinguish the men from the boys sooner than later.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to