• FEBRUARY 15, 2005

PSU Banks: 3QFY05 contradicting 9mFY05

The <>PSU banking sector posted a mixed performance for the quarter ending December 2004 with the big daddy <>SBI dwarfing all its peers in every respect. With most players having improved their capital adequacy ratios and showing proactiveness in safeguarding their asset quality, the sector seems to have of late, been focused on quality rather than quantity (which is not necessarily a bad thing).

Performance Summary
The sector posted a 6% YoY growth in 3QFY05 topline aided by a robust 61% YoY growth in 'other income'. The bottomline growth for the third quarter shrinked to 3.6% with a 110% jump on the provisioning side. The picture however, looks reversed when viewed with respect to 9-month figures. While the 9 month YoY topline growth figure (standing at 4%) does not vary much, the other income, provisioning, operating profit and bottomline figures spell concern.

Rs (m)3QFY043QFY05 Change9mFY049mFY05Change
Income from operations 103,148 110,053 6.7% 312,421 324,861 4.0%
Other Income17,686 28,400 60.6% 77,117 69,538 -9.8%
Interest Expense62,985 60,757 -3.5% 188,938 187,943 -0.5%
Net Interest Income40,163 49,296 22.7% 123,483 136,918 10.9%
Other Expense28,414 33,803 19.0% 83,762 97,950 16.9%
Operating profit / (loss)11,749 15,493 31.9% 39,721 38,968 -1.9%
Operating profit margin (%)11.4%14.1% 12.7%12.0%
Provisions and contingencies10,755 22,622 110.3% 41,518 41,227 -0.7%
Profit before tax18,680 21,271 13.9% 75,320 67,279 -10.7%
Tax 4,544 6,629 45.9% 21,584 24,188 12.1%
Profit after tax/ (loss)14,136 14,642 3.6% 53,736 43,091 -19.8%
Net profit margin (%)13.7%13.3% 17.2%13.3%
* includes SBI, Corporation Bank, OBC and BOI

What has driven performance in 3QFY05?
Earnings: While the average growth in the asset book of the PSU banks was around 22%, the same was led by a robust credit offtake both in the retail and corporate segments. SBI, despite its mammoth size has continued to outgrow its peers. Most of the entities have tried to prune their interest costs by increasing the share of low cost deposits in their portfolio. However, the pressure on yields (both in advances and investments) has constrained net interest income expansion. While the treasury gains and fee income amplified the 'other income' for the banks in the third quarter, the 9 month figures for the same have dipped by 10% when compared to those of the previous year (9mFY04). Also, the other income gain is not universal as banks like OBC and BOI continued to take the treasury hit due to rising interest rates. This shows that the banks' other income side continues to rely heavily on treasury profits with little support from fee based income.

Margins: While the operating profit for 3QFY05 shows a stellar 31% jump, the surge in non-interest expenses has taken a toll on the sector's 9mFY05 figures. With a 13.3% hike in the employee wages (resulting in arrears of Rs 66 bn) the operating margins are expected to continue to languish in the coming quarters. The growth in bottomline however varies as per the bank's individual stand on the provisioning front. While the likes of OBC have not shied away from taking a hit on their bottomline and provided for NPAs (read GTB's legacy), others like Corporation Bank have compromised on their incremental provisioning to save an impact on their bottomline. Consistent with the operating margins, the sector's 9mFY05 bottomline growth figure has take a hit despite a positive growth in the third quarter.

Asset quality: The sector has shown more concern for reducing and containing asset slippages than ever before. The banks have witnessed a steady drop in their net NPA to advances figures supported by an increasing NPA coverage ratio. However, the figures continue to remain high as compared to their peers in the private sector. Also, entities such as BOI continue to figure at the bottom of the league when it comes to asset quality.

What to expect?

With consolidation and post budget reforms on the anvil, the sector is trading at a significant premium to its desired valuations. Although the consolidation drive is expected to augur well for the sector as a whole, it will largely be the stronger entities (SBI and the like) that will stand to be the major beneficiaries of the same. Also, competition from their foreign and private sector counterparts and pressure on margins may pose a threat to market share of the PSU entities. Rightsizing their workforce and optimizing on their retail reach (to economize the cost of funds) seem to be the only solutions that the PSU entities could opt for to counter such competition. While SBI is ideally placed to benefit from the sector dynamics going forward, we do not rule out the possibility of OBC and Corporation Bank showing fidelity in the long run.

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