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Tuesday, Feb 03, 2004

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Banks' profitability up despite drop in treasury incomes

Poornima Mohandas

Mumbai , Feb 2

THE warnings by analysts that banks' profitability will be adversely affected once treasury incomes drop seem exaggerated in retrospect. While there may be no windfall gains in profits, most banks have been able to show 16-45 per cent jump in the bottom line for the third quarter of this financial year vis-a-vis the corresponding period of the previous year.

As the tables indicate some banks such as State Bank of India, Bank of India and Union Bank of India among the public sector banks and HDFC Bank and IDBI Bank among the private players have shown dips in the other income component, due to reduced opportunities for booking profits in Government bonds. The previous two years had seen all banks staging large profits solely by playing in the debt markets.

With interest rates falling, prices of Government bonds rose day by day. ``In such a market, anyone could have made money," market experts say. Although few are making profits today from the bond markets with interest rates having seemingly bottomed out alternative streams of revenue are being discovered.

A case in point is ICICI Bank, which has upped its other income by over 40 per cent through its treasury income mainly out of equity gains and increased reliance on fee-based activities, said a report from Enam Securities.

There are two income streams for banks: net interest income (NII) earned from core banking business of taking deposits and disbursing loans and other income. NII is interest earned from loans-interest expended on deposits and other income is income derived from non-core operations, which includes trading income in debt and forex markets and fee-based activities.

In the third quarter of 2003-04, several banks have registered profits by reduced dependence on bond trading income by appropriately increasing the mix of fee-based activity such as insurance/MF distribution, guarantees and LC business, forex commission and brokerage activities. In the case of Canara Bank, it has added Rs 100 crore to other income from recoveries made from scam-related cases, which had earlier been written off, said a Motilal Oswal Securities report.

It is also observed that new age private banks have increased their NII sharply (at an average of 62 per cent) when compared to public sector banks. This is possibly due to reluctant and selective lowering of lending rates while slashing deposit rates offered to depositors. In a soft interest rate regime ideally all interest rates should come down both on the deposit and loan front.

Another contributing factor to the drastic jump in NII is the burgeoning proportion of low cost deposits garnered by private banks, i.e., savings and current accounts leading to lower interest expenditure. On savings accounts, banks have to pay only the fixed interest rate of 3.5 per cent and derive the benefits of a large money float.

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