The Hindu Business Line : Treasury gains lift PSBs' profits

PUBLIC sector banks can be expected to rake in at least Rs 18,000 crore in profits for the fiscal ended March 2004. That is, if the 14 banks (including a number of big banks) that are yet to announce their results stick to the trend laid by the 13 banks that have posted a 50 per cent growth in profits for the fiscal 2003-04.

Profit growth has been sizeable during the last few years - most notably in fiscal 2002 when profits doubled to about Rs 8,300 crore.

These profits have come mostly from selling off government securities and less from the traditional business of lending.

Income from lending operations has grown at a modest 7 per cent over the past three years.

In 2004, despite the much-touted economic recovery, interest income from loans has remained modest. In some cases, they have stagnated or declined.

Banks made bumper profits by selling government securities in their portfolio that had appreciated in value following the steep decline in interest rates. This has been the major trend during the past three years and it was not very different this year.

Gains from such sale of government securities contributed significantly to this year's profits - ranging from 50 per cent to 200 per cent of profits of individual banks. On an average, other income (mainly profit on sale of investments) grew by 25 per cent for all banks.

What is noteworthy this year is that for many banks, interest expense on deposits showed an absolute decline for the first time. For the 12 banks for which details are available, interest expense has declined by 4 per cent.

The impact of lower interest rates was seen here as deposits grew by 16 per cent for the banking system as a whole.

For banks, interest expense is normally the biggest item of expenditure - accounting for as much as 65 per cent of expenses. This has now started declining and is down to about 57 per cent.

Bankers said interest rates have touched the bottom. The benchmark 10-year government paper has been hovering at just around 5 per cent.

Bankers expect rates to remain stable with the possibility of a slight upward movement in the event of a dramatic increase in loan demand.

Given this scenario, it will be difficult for banks to make the kind of gains they have made in the recent past.

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