Banks: Performance review

At the dusk of 2004, as the stock market touches dizzy heights, delights investors and sends across a positive vibe, we take a review of the performance of one of the sectors, that has been a ‘favorite’ amongst investors – banking.Public Sector Banks
Considered to be legendry laggards, the PSU banks failed to invalidate investor perceptions. The growth in terms of net interest income grew marginally thanks to the incessant escalation in the operational expenses of these banks. A revision in the employee pay scale (with retrospective effect) further added to the banks’ woes and increased the wage bill by 13.3%. The banks together had to spend Rs 23 bn to 24 bn in this regard. At a time when banks are trying to improve their capital base and make higher provisions for credit, operational and market risks to meet the stringent Basel II norms, the wage hike had a strong impact on their bottomlines.

The other income fillip that was witnessed in FY03 was negated in FY04 with the interest rates falling and most banks booking massive treasury losses. This was coupled with the one-time shift of their investments from the “available for sale” to the “held to maturity“ category, which the banks made to prevent further losses in the treasury side.

The following chart shows the performance of top 5 PSU banks in 1HFY05.

With exception to OBC and PNB, no other bank showed a significant growth in terms of interest income while the exposure to G-Secs led to a poor show on the ‘other income’ side. The rise in deposit rates and inability to match it with an identical hike in advance rates put further pressure on the banks’ margins.

Private Sector Banks
As usual, the private sector banks sustained their edge in terms of operational efficiency and bottomline growth. The other income hit did not spare the bottomlines of even the private banks, although, in a sharp contrast to PSUs, the ‘treasury loss effect’ is more visible only in case of UTI and ING Vysya Bank.

The following chart shows the performance of top 5 private banks in 1HFY05.

ICICI Bank’s performance remained stagnant during the period, while HDFC and IDBI bank have shown considerable growth in their ‘core’ income. The private banks also cashed in on their fee income growth to augment their bottomlines.

Quality of Assets
Nevertheless, the banks showed more prudence in terms of cleaning up their balance sheets and making adequate provisions for bad assets. Also, they adopted rigid credit appraisal norms to prevent asset slippage.

In this case, the PSU banks have taken the lead and have left behind their private sector counterparts. The ratio of gross NPAs to advances has declined in the last four years for private sector and PSU banking majors, but in the case of the latter it has been faster. This is despite the rigid priority sector lending obligations that the PSUs have had to comply to. This fact was reiterated in our earlier article. OBC is one of the few PSU banks that have succeeded in bringing its net NPAs to zero while others like HDFC Bank and IDBI Bank in the private sector are nearing the target.

To conclude, both private and public sector banks seem to have a long way to go in terms of augmenting their growth rates and dedicate more focused efforts to streamline their core business. The above stated facts also lead to the comprehension that banks need to reduce their G-Sec exposure and cater to the growing credit demand from the agri and infrastructure sectors.

As the Indian economy continues its path to reform, the industry will play a key role in supporting the infrastructure drive. But for longer-term efficiency and compliance to new international norms, scale is the key. Consolidation may very well be the mantra of 2005.