Banks' net profit on a downward spiral

Bottomlines Slipped for the third consecutive quarter

Banks are expected to report a decline in net profit in the quarter ended March 2005 for the third consecutive quarter in a row.

The banking sector's honeymoon with profits ended in the quarter ended June 2004, when its net profit had increased by 18.75 per cent. Thereafter, it slipped by 8.32 per cent in the quarter ended September 2004 and 17.78 per cent during the quarter ended December 2004.

An analyst covering the banking sector at Motilal Oswal Research expects banks' profits to decline a bit in the quarter ended March 2005.

In line with expected results, bank stocks have remained steady in the quarter ended March 2005. There was a sharp downturn in share prices of bank scrips in the first eight trading days of the current month (April 2005).

Of the 37 listed banks, shares of only four banks, namely Allahabad Bank, UTI Bank, Andhra Bank and Kotak Mahindra Bank increased by over 10 per cent each between December 31, 2004 and April 2005.

However, the share prices of 15 banks declined by over 10 per cent, while shares of Centurion Bank, Dena Bank, Dhanalakshmi Bank, Bank of Rajasthan, Bank of Maharashtra, UCO Bank, ING Vysya Bank and Karur Vysya Bank declined by over 15 per cent each.

Bank stocks got a real leg up when the Reserve Bank of India (RBI) announced a new managerial policy for the state-owned banks and the roadmap for ownership of private sector banks.

This triggered a strong rally, with most public and private sector banks hitting the roof for a while. However, foreign institutional investors' investment cap in the public sector banks has proved to be a dampener for such stocks.

As a result, share prices of most of the banks have crashed by over 10 per cent from the 52-week highs scaled after the banking sector reforms were spelt out by the RBI after the Union Budget on February 28, 2005.

The share price of the State Bank of India has declined from the 52-week high of Rs 751 in March 2005 to around Rs 650. HDFC Bank has declined from a high of Rs 630 to Rs 545, Bank of India from Rs 120 to Rs 99.50.

Punjab National Bank's shares declined from Rs 521 to Rs 381, UTI Bank shares declined from Rs 269 to Rs 229, Oriental Bank of Commerce dipped from Rs 382 to Rs 304 and shares of Andhra Bank declined from Rs 123 to Rs 107.

For the quarter ended March 2005, analysts expect banks to witness steady growth in their core operations (net interest income and fee income), on the back of sustained growth in credit offtake and lower interest rates.

However, growth in net profit would be a function of the higher base effect, treasury gains or losses in the fourth quarter, mark-to-market losses on non-HTM portfolio, and provisioning requirements for wage arrears, pensions and non-performing assets.

The banks are likely to report an average net interest income growth of 14.4 per cent in the fourth quarter and their net profit is expected to decline by one per cent year-on-year.

The fourth quarter growth in net interest income, however, would be lower than that posted during the first three quarters of fiscal 2004-05.

The banks had recorded net income growth of 17.28 per cent in the first quarter, 26.32 per cent growth in the second quarter and 21.15 per cent in the third quarter.