Dec 15, 2004|
Private banks: Optimism not unfounded
Indian private sector banks, deemed to connote, the face of new-age banking, are gearing up to play a vital role in the economic progress of the country. Capital, technology and human resources…every possible factor for expansion is being accessed by these entities. The regional domain no longer remains a priority for these entities, but they are also eyeing the international markets. From raising capital through ADR and FCCB issues to expanding operations in major overseas destinations, no stone is being left unturned.
In this light, it is pertinent to analyse as to how far have these initiatives have succeeded in yielding better returns for the banks. For our analysis, we have included the top 4 Indian private sector banks, namely, ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank.
A fundamental comparison…
|(Rs m) - average
|Net interest income
|Operating profit margin (%)
|Profit after tax
|Net profit margin (%)
|No. of shares (m)
|Diluted earnings per share (Rs)
|Price/ book value (x)
|Price/ adj.book value per share (x)
|Price/ cash flow per share (x)
The sector has witnessed a shift of focus from treasury operations and retail lending to core banking (corporate lending and priority sector advances). As is evident from the table above, the average growth in interest income of the four banks in 1HFY05 was 5%, which is after factoring in the underperformance on the part of ICICI Bank (-1.8%). IDBI outperformed the rest with a 32% growth in interest income. The prospects for interest income growth continue to remain promising.
Thanks to the gloomy picture of the Government paper and debt markets, the banks had to encounter a negative surprise on the “other income” front (YoY growth –9.4%). To prevent further losses in the treasury side, the banks made a one-time shift of their investments from the “available for sale” to the “held to maturity“ category, which entailed a further hit on their bottomline. However, this was compensated by a better credit off take, both on the corporate and the retail side. The banks optimized on their retail franchise and technology muscle to garner a wider customer base. This coupled with improvement in operating efficiency, enabled the banks to sustain a growth in bottomline. Nevertheless, a 24% jump in other expenses proved to be a drag on the bottomline.
How the markets responded?
The optimism in the market was a different one this time. It was in response to the favourable growth strategies employed by the banks and the strong fundamentals following the same. The following graph shows how much, Rs 100 invested in October 2003 in each of these stocks, has yield in the span of 1 year.
UTI bank seemed to be riding highest on investor expectations while ICICI Bank and HDFC Bank under-performing peers. IDBI Bank, following the news of its merger with parent IDBI, raised the interest of the investors.
What to expect?
With non-food credit picking up, the banks can now expect to grow their asset size faster. This combined with the increase in interest rates on advances is likely to impact operating margins positively. At the same time, penetration into the Tier-II and semi urban areas is expected to garner low cost funds for the banks. Fee based income is also expected to contribute significantly to the bottomline.
With the obligation to comply with the Basel II accord, the concerns for improving the quality of assets has forced most banks to make sufficient provisions for NPAs. But the risk of higher NPAs in the future cannot be ruled out. Better spreads and treasury yields in the near future surely makes the Indian private banking industry worth looking out for from a long-term perspective!
More Views on News
Aug 10, 2017
IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.
Aug 10, 2017
Asset quality will be the key thing to watch out for going forward.
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.
Jul 6, 2017
Does the stock score on the value versus price equation?
Jun 27, 2017
Should one subscribe to the IPO of AU Small Finance Bank Ltd?
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407