Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
PSU Banks: Better year ahead? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 21, 2002

    PSU Banks: Better year ahead?

    After having witnessed a sluggish credit demand in FY02, the Indian banking sector showed signs of revival during the first quarter of FY03. Non-food credit growth was buoyant at 25% during the months of May, June and July 2002. Expansion in deposits has also remained healthy at around 18% during this period.

    The industrial environment in the country is also recovering marginally. This is reflected from the index of industrial production (IIP), which grew by 4% in June 2002, as against 2.6% in June 2001. The major contributor to this growth was a 1.6% growth in capital goods sector in 1QFY03, as against a drop of 3.4% recorded in the entire FY02. There are, of course, growing concerns about weak monsoons nipping this recovery in its bud. However, since FY02 was a dismal year for the entire banking sector, on a YoY basis FY03 is likely to be comparatively better.

    The financial performance of PSU banks was satisfactory during the June quarter of FY03 with a 27% rise in earnings. Their net interest income however, recorded subdued growth. We have included five major banks, SBI, Bank of India, Bank of Baroda, Oriental Bank of Commerce and Corporation Bank in our sector study for the first quarter.

    Cost control fuels earnings
    (Rs m) 1QFY02 1QFY03 Change
    Income from operations 111,571 117,938 5.7%
    Other Income 15,207 17,031 12.0%
    Interest expense 76,792 79,773 3.9%
    Net interest income 34,779 38,165 9.7%
    Other expenses 26,329 27,236 3.4%
    Operating Profit 8,450 10,928 29.3%
    Provisions and contingencies 7,200 7,792 8.2%
    Profits before tax 16,457 20,167 22.5%
    Tax 5,996 6,926 15.5%
    Net profits 10,462 13,241 26.6%
    Performance measures      
    Operating Profit Margin (%) 7.6% 9.3%  
    Net profit margin (%) 9.4% 11.2%  
    Cost to income ratio (%) 52.7% 49.3%  
    Other income to total income (%) 12.0% 12.6%  
    Effective tax rate (%) 36.4% 34.3%  

    The sector’s interest income from advances grew by a marginal 3%. Lower growth in interest income could be mainly due to two factors. Firstly, interest rates in the economy have dropped significantly over the last one-year. This has resulted in a decline in banks’ yield on advances. Secondly, increasing competitive pressure from private banks seems to have diverted loan growth from PSU banks to new generation private banks. Also, to generate business volumes, PSU banks are lending aggressively at below PLR (prime lending rates). This move was triggered by higher liquidity in the banking system and stiff competition. Consequently, instead of parking their funds into government securities (G-Sec) at yields of around 7% - 7.5%, banks have started disbursing loans at around 100-150 basis points above G-Secs.

    Income breakup
    (Rs m) 1QFY02 1QFY03 Change
    Interest on advances 49,711 51,251 3.1%
    Income from investments 48,577 53,445 10.0%
    Interest on balance with RBI 13,284 13,242 -0.3%
    Total 111,571 117,938 5.7%

    Also, to negate the impact of sluggish corporate demand, PSU banks eyed retail finance sector with housing being the major focus area. With access to low cost funds, these banks offered competitive rates for retail finance and increased the proportion of retail assets to total assets. Going forward quality of services provided by PSU banks and delivery time holds the key for success in the retail finance market.

    The key driver of PSU banks’ June quarter performance was lower operating cost. The sector’s cost to income ratio declined to 49% from 53% in 1QFY02. PSU banks are reaping benefits of VRS launched in FY01, which enabled them to reduce their employee cost. Gradual improvement in technology implementation also helped them in lowering operating cost. Most of these banks have computerized over 75% of their business and are planning to implement core-banking solutions in the current fiscal. Cost to income ratio is expected to come down further, as these banks improve productivity (by going for second round of VRS) and upgrade technology.

    Apart from cost containment, keeping a check on quality of assets is also important, as it will determine their future financial performance. Net NPAs to advances ratio for the entire Indian banking sector was at around 6% in FY02. With aggressive provisions by PSU banks, which forms major portion of the bad loans, the ratio is expected to come down in future. As these banks clean off their books and upgrade level of services provided to customers, their market valuations could improve. Re-rating in valuations would also be supported by better financial performance, led by operating cost reduction.



    Equitymaster requests your view! Post a comment on "PSU Banks: Better year ahead?". Click here!


    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)