The Hindu Business Line : Banks put up good show in Q2

Robust business growth, impressive performance on fee based income and strong showing on core operations highlight the earnings scorecard of banks for the quarter ended September. Re-pricing of loans by about 50 basis points in June and August following upward revision in the prime lending rate appears to have improved yields on advances for many banks.

This has primarily helped them maintain and even improve their net interest margins (NIMs) by about 10-15 basis points on a year-on-year basis. However, scorching pace of expansion in balance sheets of some of the banks has exerted some pressure on the funding costs.

Public Vs Private

While the quarter has proved to be a good one for the banking industry, private sector banks continued to surpass their counterparts in the public sector on several key parameters such as growth in net interest income (NII), fee income and net profits.

Public sector banks (PSBs), on an average have recorded a year-on-year (YoY) growth of about 16 per cent in earnings, while the figure for private sector banks is double at 32 per cent. In terms of containing costs, PSBs have fared better than their counterparts in private sector.

The rally in the bond market during the second quarter had resulted in expectations of banks reporting lower provisioning. However, there has been a mixed bag of results on this front. In case of ICICI Bank and HDFC Bank, the higher provisioning in the quarter was mainly towards non-performing assets (NPAs) and standard assets.

For Federal Bank, the 43 per cent rise in provisioning was largely on account of one-time provision for VRS expense, which more than offset the benefit arising from write-back on its investment portfolio. However, Union Bank of India, Canara Bank, IOB and Karur Vysya Bank reported lower provisioning for the quarter.

Investment Portfolios

With yield on 10-year government paper currently hovering at 7.5 per cent and close to its six-month low, banks may continue to report some profits on their investment portfolios during the coming quarter or two.

What is interesting to note is that some PSBs have been able to contain the cost of deposits at a time when the banking system was faced with a situation of tight supply of funds. SBI's performance has particularly been notable on this front. Its strategy of reducing focus on bulk deposits seems to have paid off. The improvement in the share of low-cost deposits to 43 per cent from 40 per cent a year ago together with a rise in yield on advances have helped SBI in improving its NIMs to 3.32 per cent (up 15 bps YoY).

Regulatory Hurdles

Punjab National Bank has also put up a good show. By controlling credit growth (29 per cent) and leveraging on its CASA base, it has managed to increase its NIMs by 16 bps to 4.16 per cent. Compared to its peers, PNB's loan to deposit ratio is low at about 68 per cent and this offers it a considerable degree of flexibility to expand its loan book.

However, private sector banks have remained sluggish in mopping up low-cost resources. While HDFC Bank recorded a dip of 100 bps in CASA (to 52 per cent), for ICICI Bank, the proportion remained flat at 22 per cent. Regulatory hurdles in obtaining branch licenses may have affected this component. With ICICI Bank has been granted licences for 100 branches and HDFC Bank expected to get them over the next few weeks, low-cost deposit mobilisation by these banks is likely to pick up.

Fee Income

However, on the fee income, private sector banks with a growth of about 35 per cent, have outpaced the PSBs by a considerable degree. Among the pack of PSBs, SBI has shown a strong growth of 36 per cent in fee income, which largely came from distribution of third party products and technology-based initiatives. The asset quality for the banking sector has remained good due to lower incremental non-performing assets and faster recoveries. Net NPAs have fallen to about 1.1 per cent from 1.9 per cent a year ago.

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