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PSU Banks: Commendable performance in 3Q

Mar 11, 2002

PSU banks reported encouraging performance for the quarter ended December 2001. Despite subdued credit growth, the sector managed to report double digit growth in income from operations. However, this growth was fueled by higher investment income. We have covered 5 top public sector banks: State Bank of India, Bank of Baroda, Bank of India, Oriental Bank of Commerce and Corporation Bank for our sector study.

(Rs m) 3QFY01 3QFY02 Change
Income from operations 103,493 115,675 11.8%
Other Income 12,965 16,000 23.4%
Interest expense 71,242 79,517 11.6%
Net interest income 32,251 36,158 12.1%
Other expenses 26,285 28,346 7.8%
Operating Profit 5,966 7,812 30.9%
Operating Profit Margin (%) 5.8% 6.8%  
Provisions and contingencies 11,183 6,503 -41.8%
Profit before Tax 7,749 17,310 123.4%
Tax 1,909 6,266 228.3%
Profit after Tax/(Loss) 5,840 11,043 89.1%
Net profit margin (%) 5.6% 9.5%  
No. of Shares (m) 1,771 1,795  
Diluted Earnings per share* 13.0 24.6  
P/E Ratio   4.0  

Non-food credit growth for the sector, year to date till January 11, 2002 registered a growth of 8.7%, as against 12.1% growth recorded in the comparable previous period. Banks’ non-SLR investments including debt and equity instruments of corporates, have also grown at a slower pace of 4.2% during the period, compared to 13.6% growth reported in the corresponding period last year. On the other hand, food credit has recorded a strong growth of 25.7% during the period April – October 2001. Faced by lower credit growth, banks invested higher amount in government securities. Bond prices continued to rise with lower interest rates, which increased the investment gains of banks. These gains are reflected in higher other income of the sector.

During the quarter, operating margins of the sector increased by 100 basis points to 6.8% on the back of lower operating expenses. Most state run banks launched voluntary retirement scheme in FY01, which saved their employee cost in the current year. The sector's cost to income ratio declined to 54% from 58% in the third quarter of the previous year. Cost saving measures, boosted the sector's operating profits by 31%.

A 23% rise in other income and a 42% fall in non-performing assets provisions spurred the sector's pre tax profits by 123%. However, higher tax provisions trimmed the bottomline growth to 89%.

The public sector banks are expected to end the year with a strong growth in earnings as most of the banks had made provisions for VRS expenses in the fourth quarter of FY01. Consequently, on a YoY basis earnings growth will be relatively higher. However, operating profit growth is likely to be lower due to sluggish credit demand and pressure on interest spread.

Public sector banking stocks witnessed a rise in valuations in the last two months on expectations of rise in foreign investment limit. However, the FII limit has remained unchanged in the coming budget. Valuations of the sector could come under pressure in the short term if credit growth continues to remain sluggish.

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