Jun 26, 2002|
Private banks: Margins dip
Private banking sector maintained a strong earnings growth in FY02. Bottomline growth of private banks was fueled by an exponential rise in fee-based income, which accounted for over 20% of total income. We have included four major new generation private banks, ICICI Bank, HDFC Bank, UTI Bank and IDBI Bank in our sector study.
|Income from operations
|Net interest income
|Operating Profit Margin (%)
|Provisions and contingencies
|Profit before Tax
|Profit after Tax/(Loss)
|Net profit margin (%)
|No. of Shares (m)
|Diluted Earnings per share*
Contrary to the general trend witnessed in the banking industry of slowdown in credit demand, private banks' loan portfolio reported a strong growth. Their aggressive focus into retail lending with superior quality of services and innovative products, fueled loan growth. This was further supported by lower interest rates. Most of the banks reduced their interest rates by 100 to 150 basis points during the year for retail financing. Consequently, interest on advances increased by 25% to Rs 22 bn and accounted for 39% of total income.
|Interest on advances
|Income on investments
|Interest on balance with RBI
Banks in general recorded commendable rise in income from investments with falling interest rates. Private banks have also been successful in snatching away some market share from PSU banks in cash management services and forex trading.
Private banks also managed to bring down cost to income ratio further to 46% from 50% in the previous year by leveraging on technology infrastructure and existing branch and ATM network. These banks are expanding their reach further, which is likely to curtail further reduction in cost to income ratio in the coming years. Amount provided by them for non-performing assets witnessed a three fold rise as they opted to increase the NPA coverage ratio and reduce the level of NPAs. These banks currently have provisions to gross NPA ratio of over 50%.
Private banking sector is currently trading at a price to book value ratio of 1.7x based on FY02 financials. While old generation private banking stocks witnessed a strong rise, stock prices of new private banks inched up marginally, over the last few months. This is due to the fact that valuations for these banks were already higher and expectations of consolidation in the sector attracted investors to old generation banks which were trading on the lower side of valuations. However, considering the growth potential of new private banks and their proactive strategies, valuations are likely to get re-rated further.
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