X

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.
Banks: Interest rate concerns - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Nov 18, 2003

    Banks: Interest rate concerns

    The RBI has come out with its latest report on Trends and Progress of banking in India for 2002-03. While most of the central bank's statistics indicate improving fundamentals of the Indian banking system, there is one aspect that the Reserve Bank Of India (RBI) is concerned about. This is the strong dependence, currently, of Indian banks, especially public sector banks, on trading income (profit from sale of investments). The RBI has highlighted that the large policy-induced changes in the interest rate environment have brought forth the issue of interest rate sensitivity of banks' balance sheet.

    This means that the bottomline of most banks in the country is to a large extent dependent on the kind of trading profits they make. And trading profits are largely dependent on the interest rate scenario prevailing in the country. This means that as of now there is a direct linkage between the interest rates and bank bottomline. The RBI in order to ensure that banks are adequately protected from any contingency arising from a rising interest rate environment had advocated the need of an Investment Fluctuation Reserve (IFR) to be set up by each bank.

    Just to highlight the extent of the dependence, according to the RBI, old private sector banks depended heavily on securities trading which contributed over 50% of their operating profits both in 2001-02 and 2002-03. Even the largest bank in the country, State Bank Of India (SBI), is not insulated from this risk, as trading profits contributed nearly 25% of its operating profits. While this was lower compared to the system average of 33%, it shows the high dependence on trading profits.

    Banks have made provisions for the IFR, but the RBI's prescribed extent is of 5% of investments in the next five years. Of all the bank groups new private sector banks were seen lagging behind their other peers in terms of provisioning for IFR. By FY03 the provisioning done by new private sector banks was only 1.1% of their investments compared to 2.1% for old private sector banks and 1.9% for foreign banks. Even public sectors banks had an IFR, which was 1.8% of their investments. We must understand that old private sector and public sector banks are more susceptible to interest rate risk (due to a relatively older portfolio of G-Secs) and hence the rush to make higher provisioning for IFR.

    By this article we are trying to highlight the fact that while banks have been able to post strong bottomline growth in the last three years, investors need to understand that it has been to an extent due to large gains from trading. While interest rates are soft as of now, any upward movement in the same is likely to adversely impact these trading profits and hence we may not see bottomline growth as seen in the last 2-3 years. The IFR is a cushion for this type of contingency. It is time to tone down one's expectations (regarding bottomline growth) and keep a close watch on the movement of interest rates in the future, as this will to an extent determine the profitability of a large number of banks in the country.

     

     

    Equitymaster requests your view! Post a comment on "Banks: Interest rate concerns". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    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

    S&P BSE SENSEX


    Aug 23, 2017 02:37 PM

    MARKET STATS