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Private Banks: Growth engine slowdown - Views on News from Equitymaster
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  • Sep 2, 2002

    Private Banks: Growth engine slowdown

    The growth rate of private banking sector slowed down in the first quarter of the current fiscal. A 26% dip in fee based income trimmed down the overall growth rates of the sector. The sector's first quarter income from operations was up by 15% and profits were higher by 17%. We have included four major new generation private banks, HDFC Bank, UTI Bank, IDBI Bank and Global Trust Bank in our sector study. ICICI Bank has been excluded, as after the merger of ICICI, the bank's financials are not comparable on a YoY basis.

    (Rs m) 1QFY02 1QFY03 Change
    Income from operations 9,745 11,236 15.3%
    Other Income 2,736 2,031 -25.8%
    Interest expense 7,543 8,004 6.1%
    Net interest income 2,202 3,233 46.8%
    Other expenses 2,016 2,654 31.6%
    Operating Profit 186 579 211.8%
    Operating Profit Margin (%) 1.9% 5.2%  
    Provisions and contingencies 1,095 577 -47.3%
    Profit before Tax 1,826 2,033 11.3%
    Tax 607 608 0.2%
    Profit after Tax/(Loss) 1,219 1,425 16.9%
    Net profit margin (%) 12.5% 12.7%  
    No. of Shares (m) 637 735  
    Diluted Earnings per share* 6.6 7.8  
    P/E Ratio   12.6  

    During the quarter, private banks successfully reduced their cost of funds. This has been achieved by increasing proportion of low cost funds. Superior quality of services offered by private banks and their marketing initiatives assisted them in attracting more saving and current account deposits. Most of the private banks are also targeting semi-urban areas to improve their deposit mix. A 47% jump in net interest income was largely supported by a steep decline in cost of funds.

    Revenue mix
    (Rs m) 1QFY02 1QFY03 Change
    Interest on advances 4,370 5,134 17.5%
    Income on investments 4,759 5,451 14.5%
    Interest on balance with RBI 576 605 5.1%
    Others 41 47 15.6%
    Total 9,745 11,236 15.3%

    Fee based income of the sector declined by 26% during the quarter. Except for HDFC Bank which registered a 21% growth in other income, all other banks reported a sharp decline. With high volatility in G-Sec yields during the first quarter, banks seem to have booked losses in their investment portfolio, which resulted in lower treasury gains. Private banks are however, strengthening their cash management services and forex revenues by leveraging on technology. The proportion of other income to total income came down to 15% in 1QFY03 from 22% in the corresponding quarter of the previous year.

    Operating profits of the sector witnessed a three fold growth due to control on operating costs. Cost to income ratio however, increased to 50% from 41% in 1QFY02 due to lower other income. The ratio is likely to remain on the higher side in the coming years with ongoing network expansion plans and frequent launch of new products by private banks. Except for HDFC Bank, all other banks' provisions for non-performing assets declined during the quarter. With lower other income, private banks in general opted to make lower provisions to show better bottomline growth.

    Currently the sector gets a P/E multiple of 13x 1QFY03 annualised earnings and price to book value ratio of 2.2x. New private banks are trading at premium valuations compared to old generation private banks and PSU banks. This is on the back of their higher earnings growth and continuous improvement in business volumes. Considering small size of private banks, they are likely to sustain these growth rates for some years and consequently valuations would also remain on the upper side.



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