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Public Banks: Beats expectations

Aug 13, 2001

Public sector banks (PSBs) reported better than expected earnings during the June quarter. While profits of the sector jumped by 27%, interest income grew by over 15%. We have included five major PSBs, State Bank of India (SBI), Bank of India (BOI), Bank of Baroda (BOB), Oriental Bank of Commerce (OBC) and Corporation Bank in our sector study.

(Rs m) 1QFY01 1QFY02 Change
Interest Income 96,865 111,571 15.2%
Other Income 12,152 15,207 25.1%
Interest Expenditure 66,591 76,792 15.3%
Operating Profit (EBDIT) 30,274 34,779 14.9%
Operating Profit Margin (%) 31.3% 31.2%  
Other Expenditure 24,816 24,605 -0.8%
Profit before Tax 17,610 25,381 44.1%
Provisions & Contingencies 5,900 7,200 22.0%
Tax 3,489 5,996 71.9%
Provision for VRS - 1,724  
Profit after Tax/(Loss) 8,221 10,462 27.3%
Net profit margin (%) 8.5% 9.4%  
No. of Shares (eoy) 1,771 1,771  
Diluted Earnings per share* 18.6 23.6  
P/E (at current price)   3.7  

The sector enjoys comparatively higher margins than the private banking sector. During the current quarter the operating margins remained stable at 31.2% due to increasing proportion of demand deposits. PSBs are initiating measures to retain the low cost deposits by improving customer service and launching new financial products. Nevertheless, they are way behind their private sector peers in technology upgradation.

Other expenses of the sector declined by 1%, due to saving in salary cost. Most of the nationalised banks launched VRS in FY01 to improve the operating efficiencies and curtail salary cost. The benefit of this is reflected in the reduction in cost to income ratio to 49% in the June quarter from 59% in 1QFY01.

PSBs are now focusing on fee based income post the slowdown in interest income growth. Most of the banks are leveraging their large size in the forex and cash management segment. Other income contributed 12% to total income of the sector in 1QFY02. Going forward the ratio is likely to improve further with the banks concentrating more on these areas, which have comparatively lower risk. The ratio is about 20% for private sector banks due to their excellent customer service backed by superior technology.

The sector lags behind in terms of IT plans. Although, PSBs have drawn out detailed IT road maps, their implementation is likely to take time. Government ownership and their widespread network hampers their IT plans.

The sector currently trades at a P/E of 4x and Price/Book value ratio of 0.7x. The lower valuations are due to the high level of non-performing assets in the sector and slow IT upgradation. The gross NPAs of the sector during the year are likely to increase with a downturn in the industrial activity as most of the banks have lending to sectors such as steel, textile and chemicals. This could affect earnings growth of the sector with higher provisions for NPAs.

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