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FIs: NPAs trim earnings growth

Aug 23, 2001

Financial Institutions (FIs) reported subdued performance for the year ended March '01. While income from operations witnessed a marginal growth of 5%, profits declined by a huge 51% due to a substantial rise in provisioning amount. Excluding this, profits were up by a marginal 1%. We have included three major FIs, ICICI, IDBI and IFCI in our sector study.

(Rs m) FY00 FY01 Change
Income from Operations 183,505 192,172 4.7%
Other Income 5,529 3,450 -37.6%
Interest & Depreciation 155,480 162,549 4.5%
Operating Profit (EBDIT) 28,025 29,623 5.7%
Operating Profit Margin (%) 15.3% 15.4%  
Other Expenses 6,435 6,933 7.7%
Profit before Tax 27,118 26,140 -3.6%
Provisions and write offs 8,426 19,169 127.5%
Other adjustments 2,940 3,440 17.0%
Tax 2,020 870 -56.9%
Profit after Tax/(Loss) 19,612 9,541 -51.4%
Profits excld. provs. and adjsts. 25,098 25,270 0.7%
Net profit margin (%) 10.7% 5.0%  
Number of shares (eoy) 2,084 2,076  
Diluted Earnings per share 9.4 4.6  
P/E (at current price)   5.9  

Operating margins of the sector remained at about 15% in FY01. As a result operating profit was up by 6%. However, in the first quarter of FY02, ICICI and IDBI reported sharp rise in operating profits due to double digit growth in topline (IFCI's results are not yet declared). With falling interest rates most of these institutions are restructuring their debts by raising low cost funds and repaying debts having higher interest rates.

Cost to income ratio of the sector witnessed a marginal rise to 21% from 19.2% in FY00. The ratio is relatively high in case of IDBI and IFCI in the range of 25% while for ICICI it is 17%. In FY01, FIs have invested in improving the tech infrastructure and in promotional expenses to market their financial products.

Over 127% jump in provisioning amount trimmed profit growth of the sector. Among the FIs only ICICI has provisioning coverage of over 50%, while for IDBI and IFCI it is just about 20%. In FY01, ICICI made accelerated provision of Rs 8 bn to bring down the level of NPAs to 5.2%. For IFCI and IDBI the net NPA ratio is still over 10%.

The sector has high exposure to steel, textiles and chemical industry loans. In the current downtrend in industrial production, the performance of these sectors is subdued. This is likely to pressurize their profits growth, in turn adversely affecting cashflow which would lead to a likely default in loan repayment. As a result in the current year too, FIs might have to make higher provisions for non-performing assets.

The sector currently gets a valuation of 6x FY01 net earnings. The Price/Book value ratio of the sector is below 1. Institutions including IDBI and IFCI have yet to initiate measures to clean-up their accounts by making adequate provisions for NPAs. The valuations of the sector are likely to remain under pressure in the current weak economic scenario.

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