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Private Banks: Advantage technology

Nov 22, 2001

The private banking sector maintained its impressive financial performance in the second quarter of the current fiscal. While interest income grew by 28%, earnings rose sharply by 57% fueled by a triple digit growth in other income. We have covered five major private sector banks - HDFC Bank, ICICI Bank, Global Trust Bank (GTB), UTI Bank and IDBI Bank in our sector study.

(Rs m)2QFY012QFY02Change
Interest Income 11,483 14,711 28.1%
Other Income 1,073 3,331 210.4%
Interest Expenditure 8,372 10,832 29.4%
Operating Profit 3,111 3,879 24.7%
Operating Profit Margin (%)27.1%26.4% 
Other Expenditure 2,229 3,611 62.0%
Profit before Tax1,9563,60084.0%
Provisions & contingencies 499 817 63.7%
Tax 270 922 241.9%
Profit after Tax/(Loss) 1,187 1,861 56.8%
Net profit margin (%)10.3%12.6% 
No. of Shares (eoy) 833.4 894.8  
Diluted Earnings per share* 5.3 8.3  
P/E (at current price)  12.8  
*(annualised)   

Excluding GTB, the other four banks have reported an even more solid performance. Interest income growth stood at 40% YoY and net profits doubled in the September quarter. GTB was the only bank among top private banks which saw 18% degrowth in interest income and a drop of over 80% in profits. The bank's financials were hit by high cost of borrowing, which led to thin interest spread. IDBI Bank on the other hand reported stunner results in 2QFY02 after posting a loss in the comparable previous quarter.

During the quarter, the sector's interest margins declined marginally by 70 basis points to 26.4%. On the other hand PBT margins rose to 25% from 17% in 2QFY01. This is due to lower cost to income ratio and a substantial rise in other income to total income ratio. While cost to income ratio came down to 50% from 53% in 2QFY01, the contribution of other income to total income increased to 19% from 9% in 2QFY01.

With the edge in technology infrastructure, private banks are giving stiff competition to public sector banks. Almost all banks concentrated on fee based income, mainly from forex and cash management services. Comparatively better services, customised solutions and innovative products enabled the sector to see a commendable rise in other income figure.

All private banks excluding ICICI Bank increased provisioning amount for non-performing assets substantially in the current quarter. This could be to increase the NPA coverage. Also, slowing industrial activity could have contributed to rise in this figure. Effective tax rate too increased to 26% from 14% in 2QFY01. These factors together contributed in lowering the earnings growth.

Currently, the sector is trading at a P/E of 12.8x and Price/Book value (PBV) ratio of 2.2x, 2QFY02 annualised earnings. The valuations are at a significant premium to the public banks which trade at a P/E of 3.6x and PBV of 0.7x, 2QFY02 annualised earnings. The sector's profits are likely to improve further once the technology infrastructure is put in place and a consequent reduction in cost to income ratio.

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