The absence of treasury gains has taken a toll on the bottom lines of Indian banks. The 43 listed banks together reported a 3 per cent decline in net profit during the December quarter, which was the first quarterly decline in four quarters.
What’s more, public sector banks have emerged as the top performers during the financial crisis. The 26 public sector banks reported a 4.8 per cent decline in net profit during the quarter, while private lenders saw their bottom lines expand by 2.82 per cent. So, the gains from net interest income (NII) could not make up for the decline in other income for the government-owned entities.
Banks had to book mark-to-market (MTM) losses on their bond portfolio, as the yield on the 10-year government bonds went up by 45 basis points (bps) during the quarter on rising inflation. With public sector banks acquiring more gilts, which were kept in the available-for-sale category, the losses were also higher. Typically, public sector banks have a larger bond portfolio, which increased further due to the record government borrowings of Rs 451,000 crore during the current financial year. What added to the woes was the inability of most banks to transfer these papers to the held-to-maturity category, which does not require MTM provisioning.
Along with the treasury-related impact, fee income, which is also a part of other income, was also impacted due to the ban on entry-load for mutual funds and the muted demand for insurance policies. As a result, against a 40-60 per cent increase in other income during the previous three quarters, the 43 banks saw a 13 per cent decline in other income in the December quarter.
But, their NII and net interest margin (NIM) figures turned out to be good.
Indian banks — private and public — recorded a double-digit growth in NIM on re-pricing of deposits and healthy credit deposit ratio (CD). But, the private banks edged up with an NII growth of 16.1 per cent compared with 12.23 per cent for public sector banks. The private banks had a single-digit NII growth in the previous two quarters on high cost of borrowings, but a decline in prime lending rates thereafter helped them rework the arithmetic.
| COLD FACTS Quarterly performance | |||||||||
| % change | Net interest income | Other income | Net profit | ||||||
| Jun-09 | Sep-09 | Dec-09 | Jun-09 | Sep-09 | Dec-09 | Jun-09 | Sep-09 | Dec-09 | |
| State Bk of India | 4.30 | 2.81 | 9.69 | 48.46 | 50.45 | 4.34 | 42.03 | 10.19 | 0.03 |
| ICICI Bank | -5.00 | -5.19 | 3.40 | 35.87 | -2.85 | -33.46 | 20.63 | 2.56 | -13.45 |
| Punjab Natl Bank | 28.87 | 22.35 | 18.61 | 112.69 | 0.88 | -22.66 | 62.38 | 31.10 | 0.55 |
| Canara Bank | 26.72 | 14.33 | 18.76 | 28.51 | 163.58 | 3.15 | 352.67 | 71.98 | 50.05 |
| Bank of India | 10.15 | 3.36 | -1.77 | 14.03 | 4.08 | -45.59 | 3.98 | -57.61 | -53.51 |
| Bank of Baroda | 13.97 | 22.48 | 9.54 | 37.17 | 25.09 | -27.95 | 84.81 | 60.43 | 17.52 |
| HDFC Bank | 7.67 | 4.79 | 12.36 | 75.87 | 56.65 | -9.20 | 30.53 | 30.21 | 31.65 |
| Union Bank | 1.58 | -11.27 | -5.37 | 117.97 | 94.47 | 17.55 | 93.70 | 39.74 | -20.49 |
| Axis Bank | 29.02 | 25.86 | 45.12 | 53.42 | 53.45 | 34.95 | 70.24 | 31.95 | 30.97 |
| Oriental Bank | 9.00 | 8.04 | 54.35 | 88.38 | 44.23 | -25.19 | 16.73 | 14.31 | 14.77 |
| % change is Y-o-Y on standalone results Source: Capitaline | |||||||||
NII is the difference of interest earned from borrowers and interest paid to lenders. Interest is both an expense and a revenue stream for banks. CD ratio is an index of the health of banking system in terms of demand for credit in proportion to total deposit growth in the banking sector. A declining CD ratio implies that banking sector was flush with funds without any corresponding demand for credit affecting the bank’s profitability in the long run.
However, the strong growth was not sufficient for banks to show growth in net profit at the aggregate level.
NIM improved quarter-on-quarter across all banks, backed by a significant decline in cost of deposits and improving CD ratio. However, NIM in the quarter-ended December 2008 was considerably higher compared to the quarter under review. Sequentially, core operating profits improved across all the banks, as contribution from NII increased and trading profits declined.
According to a banking analyst at Kotak Securities— a pick-up in loan growth compared to previous quarters, improvement in NIMs for most banks due to lower funding costs, a decline in treasury profits due to rising interest rates and worsening asset quality for few a banks such as State Bank of India, Punjab National Bank and Union Bank—were the key trends observed in the third quarter. Loan growth improved for most banks, except for ICICI Bank.
Margins continued to improve on a sequential basis for most banks aided by a sharp fall in retail one-year term deposit rates, which is currently at around 6.5-7 per cent from over 10 per cent last year. The decline in yield on loans appears to have been stemmed in the current quarter for most banks, which h is also a positive for margins. Treasury gains were, however, moderate, as interest rates bottomed out. In fact, the quantum of treasury gains booked by banks was the lowest in the past five quarters.
