Private banks: Optimism not unfounded - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Private banks: Optimism not unfounded

Dec 15, 2004

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) - average1HFY041HFY05Change
Interest income 17,138 17,989 5.0%
Interest expenditure 12,260 11,259 -8.2%
Net interest income 4,878 6,730 38.0%
Other income 5,332 4,833 -9.4%
Other expenses 4,812 5,989 24.5%
Operating profit margin (%) 7.2 9.6 33.3%
Profit after tax 3,075 3,370 9.6%
Net profit margin (%) 16.8 17.5 4.3%
No. of shares (m) 317.0 367.5 -
Diluted earnings per share (Rs) 14.6 15.3 4.6%
P/E (x) 9.5 11.4 -
Price/ book value (x) 1.9 2.2 -
Price/ adj.book value per share (x) 2.1 2.3 -
Price/ cash flow per share (x) 10.2 11.0 -

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!

Equitymaster requests your view! Post a comment on "Private banks: Optimism not unfounded". Click here!

  

More Views on News

7 Stocks that Mutual Funds Can't get Enough of (Views On News)

Dec 1, 2021

Come hell or high water, these are the top Indian stocks which mutual funds never leave.

5 Indian Banks with the Lowest NPAs. Here's How they Did It... (Views On News)

Sep 27, 2021

These banks have managed to maintain their asset quality even in the middle of a pandemic.

PNB Reports an Over Three-Fold Jump in Net Profit as Provisions Fall (Views On News)

Aug 3, 2021

The reduction in provisions for bad loans and asset quality stability may have aided the lender's earnings.

Here's Why IndusInd Bank's Net Profit Doubled in the June Quarter (Views On News)

Jul 28, 2021

All you need to know about the latest quarterly results of IndusInd Bank.

Axis Bank's Stock Falls as Results Disappoint on Asset Quality (Views On News)

Jul 27, 2021

Axis Bank's net profit more than doubles on a spike in other income and lower provisioning.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Dec 3, 2021 (Close)

S&P BSE BANKEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS