Higher provisioning, on account of non-performing assets and employee costs, especially for public sector banks, weighed on the performance of listed banks in the quarter ended March 31. Some lenders also saw a decline in their margins.
The lower treasury profits, which resulted from hardening of bonds yields, also hit the performance of banks.
Net interest margins declined marginally, as deposits started to re-price faster. However, strong loan growth in the January-March period cushioned the results. Banks passed on the rise in costs to customers through an upward revision in lending rates. As a result, yields on advances improved, and this somewhat stabilised the margins.
| BANK RESULTS PERFORMANCE REVIEW Key factors that shaped Q4 performance |
| * Pressure on interest margins on rise in funding costs |
| * Concern in loan slippages and provisions |
| * Rise in employee benefit provisions especially for PSBs |
| * Tight liquidity, hardening yields dented treasury incomes |
The banking sector reported a mixed performance, with strong earnings for private banks, owing to lower provisions, while earnings for public sector banks were hit by higher operating costs and slippages, according to Kotak Securities.
State Bank of India (SBI) stunned the market with many one-off charges. First came a huge jump in provisions for employee pay and pensions, the total bill for which, was a whopping Rs 11,000 crore. It shelled out Rs 8,000 crore from reserves and charged the balance sum of about Rs 3,000 crore to profit and loss accounts for the fourth quarter.
Second, the bank had to make accelerated provisions for non-performing assets. It provided Rs 550 crore for the teaser loan portfolio at 2 per cent for standard assets.
Pressure on margins were visible in the case of almost all banks, especially with public banks reporting a sequential decline. However, the average decline stood at about 10 basis points, since the rise in lending rates offset the increase in costs.
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Banks with a better liability franchise saw a stable margin profile in the quarter. A sharp increase in costs (over 50 basis points) was visible in the case of public sector banks like Andhra Bank and Corporation Bank and new generation private banks Axis Bank and Yes Bank.
| HIGHER PROVISIONING | ||||||
| Quarter ended | Total income* | Net profit* | Gross NPA ( %) | |||
| Mar ‘11 | % Chg | Mar ‘11 | % Chg | Mar ‘10 | Mar ’11 | |
| State Bank of India | 26,536.84 | 18.08 | 20.88 | -98.88 | 3.05 | 3.28 |
| ICICI Bank | 8,797.12 | 13.98 | 1,452.11 | 44.41 | 5.06 | 4.47 |
| Bank of Baroda | 7,168.65 | 37.8 | 1,294.35 | 42.82 | 1.36 | 1.36 |
| Bank of India | 7,130.07 | 35.86 | 493.64 | 15.36 | 2.85 | 2.23 |
| Axis Bank | 5,817.06 | 48.32 | 1,020.11 | 33.37 | 1.13 | 1.01 |
| Source: Capitaline *In Rs crore Data compiled by BS Research Bureau | ||||||
First quarter a challenge
With the Reserve Bank of India (RBI) likely to continue with its tight monetary policy stance and the sluggish credit growth affecting interest incomes in the first quarter, interest rates are likely to rise, according to analysts. The hardening yields may result in higher provisions for erosion in the bond portfolio value.
Slightly lower margins and lower growth would make 2011-12 challenging, said the chief financial officer of a Mumbai-based public sector bank.
The majority of chief financial officers of broking houses and banks said they expected margins to decline further over the next few quarters. The decline could be of 15-25 basis points on a year-on-year basis. While lending yields are close to their peak, the impact of the revised savings and deposits rates would begin to reflect in the overall funding costs.
Diwakar Gupta, managing director and chief financial officer, SBI, said the subdued demand for credit, partly on account of the rise in interest rates, would affect the first-quarter performance in the current financial year.
Banks may also see a rise in the bill for non-performing assets, since RBI had stipulated additional provisions in its annual policy for 2011-12.
SBI would have to set aside a particular sum as counter cyclical buffer to improve provisions for non-performing assets. RBI had said SBI would have to improve its provision coverage ratio by September.