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
|Income from operations
|Net interest income
|Provisions and contingencies
|Profits before tax
|Operating Profit Margin (%)
|Net profit margin (%)
|Cost to income ratio (%)
|Other income to total income (%)
|Effective tax rate (%)
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.
|Interest on advances
|Income from investments
|Interest on balance with RBI
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.
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