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Private banks: Going retail

May 23, 2001

The private banking sector has recorded an excellent financial performance during the year ended March '01. Interest income of the sector grew by 54% and operating profits witnessed a similar growth rate. We have included five major private sector banks - HDFC Bank, ICICI Bank, Global Trust Bank (GTB), UTI Bank and IDBI Bank in our sector study.

(Rs m)FY00FY01Change
Interest Income 31,353 48,278 54.0%
Other Income 6,493 8,026 23.6%
Interest Expenditure 22,739 35,175 54.7%
Operating Profit (EBDIT) 8,614 13,104 52.1%
Operating Profit Margin (%)27.5%27.1% 
Other Expenditure 5,767 10,392 80.2%
Profit before Tax9,34010,73715.0%
Provisions & contingencies 2,949 3,136 6.3%
Tax 1,933 2,031 5.1%
Profit after Tax/(Loss) 4,458 5,571 24.9%
Net profit margin (%)14.2%11.5% 
No. of Shares (eoy) 816.2 833.6  
Diluted Earnings per share21.426.7 
P/E (at current price)  17.3  
Price/Book value  2.8  

However, the topline growth and operating margins were affected adversely during the fourth quarter of the year for most of the banks. This was mainly due to a slowdown in economic and industrial activity.

The operating margins of the private sector banks which showed a sharp improvement until the second quarter of the year, witnessed a steep decline in the last two quarters of the year. The decline was on the back of higher interest cost. While the OPM of other private sector banks fell, ICICI Bank was the only one which showed a substantial rise in margins (over 1,000 basis points).

Investments in infrastructure (ATMs and branch renovation), e-initiatives (such as back office automation apart from Internet banking) and rising employee costs resulted in over 80% growth in other expenses during the year. Cost to income ratio of the sector which stood at 38% in FY00 rose to 49% in FY01. Nevertheless, the initiatives taken by these banks will payoff in the long term by widening the distribution network and will bring more cross-selling opportunities.

Due to increased investments in preference shares and bonds, the effective tax rate declined to 19% from 21% in the previous year. Also lower provision for depreciation in the value of investments as per RBI guidelines resulted in higher net profits.

Private sector banking stocks witnessed volatile activity during the year, fueled by the news of mergers & acquisitions, over exposure to capital market activities and expectation of interest rate cuts. The sector currently gets a valuation of 17 times FY01 earnings. The price to book value ratio of 3 times reflects the depressed bottomline of most of the banks (due to high operating expenses and higher provisions) which is likely to improve in the next 2-3 years, once the distribution network is set. The future valuation of the sector depends on efficiently maintaining the high growth in revenues and generating higher returns from the amount invested in technology improvement.

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