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Radhika Kamath

Higher yield on advances, fall in bond yields appear to be key factors

With India's economy continuing to grow at eight per cent, FIIs infusing capital of over $7 billion so far this calendar year and business cycle going strong, it is not surprising to see Corporate India's second quarter results exceeding the market expectations of about 25 per cent growth.

The September quarter has seen an year-on-year (YoY) earnings growth of 33 per cent for Sensex constituents. The capital expenditure cycle has also remained strong, thanks to higher levels of capacity utilisation and free cash flows. On a macro level too, favourable movement in vital indicators such as the exchange rate, Index of Industrial Production (IIP) and demand for credit has had its share in the party.

The rupee, which has gained about five per cent since its low in July, has been a key factor in propelling the stock markets to their new highs and sustaining India's position of being a preferred destination for FIIs among South Asian economies. Double-digit growth in electricity and a turnaround in mining have been principal factors leading to 11.4 per cent rise in IIP. The lending environment also sported a buoyant outlook which is reflected in the 33 per cent growth in bank credit.

On the back of this, banks reported a strong set of numbers in the September quarter after two relatively dull quarters. Higher yield on advances, fall in bond yields to the tune of about 50 basis points and robust growth in non-fund based exposure appear to be the key factors behind banks reporting good set of numbers. Earnings growth has been 16 per cent for public sector banks (PSBs) on an average, while private sector banks have notched a growth of 32 per cent.

Even on core operations, private sector banks have managed to walk away with a larger pie. This is reflected in the net interest income (NII) growth, which stood at 14 per cent for PSBs on an average and 48 per cent for private sector banks.

Retail loans continued to drive advances growth for private sector banks, in particular. What is commendable is that they have managed to sustain the growth in retail assets, despite on a larger base of previous year. ICICI Bank's retail loans have risen by 57 per cent, while HDFC Bank and UTI Bank have added about 40 per cent to their retail loan book. Among public sector banks, SBI and PNB witnessed growth of the order of about 40 per cent in their retail portfolio.

While there has been strong growth in core operational income for most banks, treasury income has seen some moderation. While UTI Bank, Bank of Baroda and Indian Overseas Bank have seen a notable fall of over 60 per cent on an average in their trading income, for few other such as ICICI Bank and Bank of India, growth in treasury income has been moderate at about 12-13 per cent. However, the sharp rise in fee income for the quarter has more than offset the fall in treasury income for many banks.

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