Despite weakening economy, public sector banks (PSBs) managed to report a double digit growth both in earnings and operating income for the September quarter. We have covered 5 top public sector banks: State Bank of India, Bank of Baroda, Bank of India, Oriental Bank of Commerce and Corporation Bank for our sector study.
Operating Profit Margin (%)
Provision for VRS
Profit before Tax
Provisions & Contingencies
Profit after Tax/(Loss)
Net profit margin (%)
No. of Shares (eoy)
Diluted Earnings per share*
P/E (at current price)
Declining interest rates pressurized the sector's interest margins, which fell by over 200 basis points. Nevertheless, reduction in cost to income ratio and a sharp rise in other income negated the impact of lower interest margins. Credit offtake for the banking sector slowed down to 13% in 1HFY02 compared to over 18% in the corresponding period of the previous year. In the first 7 months of the year non food credit offtake was only Rs 221 bn compared with Rs 355 bn in the comparable previous period. As a result, most of the banks concentrated on boosting fee based income, which is considered to be comparatively less risky and a high margin revenue stream. Consequently, other income to total income ratio of the sector increased to 13% from 12% in 2QFY01.
Right sizing efforts of the sector was reflected from lower cost to income ratio which was reduced to 53% in 2QFY02 from 58% in the comparable previous quarter. The ratio is expected to come down further to the level of about 50% by the year end and is likely to remain on the lower side in the coming years on the back of saving in employee cost. Apart from this, implementation of the latest technology would help in saving transaction costs of banks.
Although public sector banks in general are lagging behind in terms of adoption to the latest banking technology, the road map for the complete implementation of IT plans is ready. It might take longer to implement these plans considering the large branch network and government's interference in the decision making. However, once the infrastructure is put in place, the business has the immense potential to grow considering their size.
The sector witnessed about 27% rise in earnings before provisions which was commendable on the larger size and a downturn in industrial activity. However, over 60% rise in provisions for non-performing assets (NPAs), trimmed the bottomline growth of the sector. A rise in the figure could be due to increase in provision coverage by banks. Also, a slowdown in the commodity sector, which is one of the largest contributor to the banks' NPA could have inflated the provisioning amount.
The sector currently trades at a P/E of 3.6x and Price/Book value ratio of 0.7x 2QFY02 annualised earnings. Public sector banks lower valuations are the result of less proactive management (being government), large NPAs and difference in new service offerings compared to private sector banks.
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