Tamal Bandyopadhyay: Banks look less interesting

The higher interest rate regime is separating the men from the boys among the state-run banks.

First, the good news. After a decade or so, the Kolkata-based United Bank of India (UBI), has announced dividends for its shareholder (the government of India) after reporting over Rs 200 crore as net profit. Indian Bank, based in Chennai, is also set to announce a dividend payment to the government when its board meets on May 31, to take into account its audited financial results for 2005-06.

Both net and gross non-performing assets (NPAs) as a percentage of advances have also come down for all public sector banks. In fact, only one bank (Dena Bank) now has over 3 per cent net NPAs. Five others "" Central Bank of India, Bank of Maharashtra, Punjab & Sind Bank, UCO Bank and State Bank of Indore "" have NPA levels between 2 and 3 per cent. As many as nine banks have net NPA levels of less than 1 per cent. Only three banks' net NPA has risen during the year, that too marginally. For instance, Punjab National Bank's net NPA rose from 0.20 per cent to 0.29 per cent and that of Vijaya Bank's from 0.59 per cent to 0.85 per cent. In case of State Bank of Indore, the net NPA has doubled but from a very low base "" from 1 per cent to 2 per cent.

The good news ends here and the rest of the indicators of public sector banks' performance vary from indifferent to bad in a regime when interest rates have started inching up. Eight public sector banks have reported drop a in their net profits and in some of the cases, the slide is very sharp. At least for five of them, it is the second successive drop in net profit growth in as many years. And, finally, most of the banks have reported a drop in the growth of their operating profits.

The list of banks that have shown a drop in their net profits include Andhra Bank, Bank of Maharashtra, Central Bank of India, Oriental Bank of Commerce, UCO Bank, United Bank India, Union Bank and Vijaya Bank. Among the State Bank of India associates, State Bank of Bikaner & Jaipur has posted a drop in its net profit. For some of them, the drop in the net profit growth is very sharp. For instance, Bank of Maharashtra's net profit was down from Rs 177 crore in 2004-05, to Rs 51 crore in 2006-06. In case of Vijaya Bank, it is down to Rs 127 crore from Rs 381 crore. Central Bank and United Bank of India have also reported a substantial drop in their net profit figures. For Central Bank, it has been a downslide from Rs 357 crore to Rs 257 crore while United Bank of India's bottomline growth slipped from Rs 300 crore to Rs 205 crore.

What is more worrisome is the fact that some of these banks have made it a habit of posting lower net profit growth over the years. For instance, Bank of Maharashtra's net profit in 2004 was Rs 305 crore. It dropped to Rs 177 crore in 2005, and finally Rs 51 crore last year. Similarly, Central Bank of India's net profit graph has been sliding from Rs 618 crore to Rs 357 crore and finally to Rs 257 crore. The story is no different for UCO Bank, United Bank and Vijaya Bank. For UCO Bank, the net profit has been sliding from Rs 435 crore in 2004, to Rs 346 crore in 2005, and finally to Rs 197 crore in 2006. United Bank's net profit has been slipping from Rs 315 crore to Rs 300 crore and finally to Rs 205 crore over the past three years while Vijaya Bank is showing a sharper erosion in net profit growth "" from Rs 411 crore in 2004, to Rs 381 crore in 2005, and Rs 127 crore in 2006. In the State Bank family, State Bank of Bikaner & Jaipur has been worst performer. Its net profit has been slipping from Rs 302 crore in 2004, Rs 206 crore in 2005, and Rs 145 crore in 2006.

Most of the public sector banks have shown a drop in their operating profit growth. Even banks like Bank of Baroda and Allahabad Bank, which have shown a substantial growth in their net profits (Allahabad Bank's net profit rose from Rs 542 crore to Rs 706 crore and that of Bank of Baroda from Rs 676 crore to Rs 827 crore) have actually faltered when it comes to operating profits. Allahabad Bank's operating profit dropped from Rs 1,073 crore to Rs 1,024 crore while Bank of Baroda's operating profit slipped from Rs 2,302 crore to Rs 2,032 crore. Despite a drop in net profit, they could show higher net profit by virtue of lower provisioning. Allahabad Bank has made a provision of Rs 269 crore in 2006, against Rs 476 crore in 2005. Similarly, Bank of Baroda allocated Rs 917 crore for provisioning, down from Rs 1,439 crore.

Finally, except for UCO Bank, United Bank of India, Vijaya Bank, Indian Overseas Bank, Punjab National Bank, Dena Bank and State Bank of Indore, almost all public sector banks including the State Bank of India have made lower provisioning in 2006. Had they raised their provisioning level to lend solidity and robustness to their balance sheets to withstand future shocks, there would have been further erosion in their net profit growth. The higher interest rate regime is separating the men from the boys among the state run banks. We will be able to spot the boys taking a closer look at the disclosures made by the various banks. Let's wait till the full balance sheets are made public.