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Private Banks: Challenges ahead - Views on News from Equitymaster
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  • Aug 8, 2001

    Private Banks: Challenges ahead

    The private banking sector has recorded a strong financial performance in the first quarter of FY02. Interest income of the sector grew by 36% and net profits witnessed a growth of 23%. 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) 1QFY01 1QFY02 Change
    Interest Income 10,610 14,428 36.0%
    Other Income 1,841 4,008 117.7%
    Interest Expenditure 7,611 10,729 41.0%
    Operating Profit (EBDIT) 2,999 3,699 23.3%
    Operating Profit Margin (%) 28.3% 25.6%  
    Other Expenditure 2,407 3,402 41.3%
    Profit before Tax 2,433 4,305 76.9%
    Provisions & contingencies 390 1,548 296.7%
    Tax 526 885 68.1%
    Profit after Tax/(Loss) 1,516 1,871 23.4%
    Net profit margin (%) 14.3% 13.0%  
    No. of Shares (eoy) 833.4 857.2  
    Diluted Earnings per share* 7.1 8.7  
    P/E (at current price)   12  

    The operating margins of the sector, however declined by about 260 basis points. This was due to a significant drop in margins of HDFC Bank and Global Trust Bank. More liquidity in the banking system resulted in pressure on margins.

    Slowdown in the industrial and economic activity affected interest income growth of the sector. In FY01, the growth was about 54%, which has come down to 36% in the June quarter. Interestingly, private banks shifted their focus on fee based income from the traditional funds based revenues to fuel the earnings growth. Other income of the sector jumped by 118%, contributing 22% of total revenues compared to 15% in 1QFY01. Other income includes commission, fees, foreign exchange earnings and earnings from debt securities.

    Other expenses of the sector increased by 41% due to investments in infrastructure (ATMs and branch renovation) and technology. Cost to income ratio of the sector, however came down to 44% from 50% in 1QFY01, and 49% in FY01.

    Almost all private banks increased the provisioning amount for non-performing assets (NPAs) during the quarter. This was due to a change in provisioning norms by the RBI, and to increase the NPA coverage to show the fair picture of accounts. Grim economic outlook also contributed in inflating the provisioning amount.

    Private banking sector is currently trading at 9x the 1QFY02 annualised earnings. The Price/Book value ratio of the sector at 3x and has remained more or less similar in the last four months. Earnings of most of the banks are still depressed due to high operating expenses on technology and infrastructure. Profits will show better growth once the distribution network is in place with the latest technology. These banks, which currently provides all value added services will be able to show better growth then as fixed cost will be relatively low. However, increasing challenges in the grim economy scenario is likely to put pressure on their margins.



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