The Hindu Business Line : Profit wheel turns full circle

Chennai, July 26 It has been a near washout so far. Many public sector banks have seen profits decline sharply and in a few cases, wiped out, in the first quarter of this fiscal.

Only State Bank of India seems to have survived this difficult quarter and posted a decent 15 per cent growth in profits.

For the 11 other public sector banks, whose results are available, there has been a 36 per cent decline in profits in the first quarter of this fiscal when compared to the same period in the previous fiscal.

In that previous quarter, these banks had posted a 40 per cent increase in profits. The wheel of fortune has now turned a full circle.

Then, in Q1 of fiscal 2007-08, it was still heady days, with GDP growth at 9 per cent, a mood of optimism and seemingly endless profits.

Inflation factor

The picture has changed drastically over the past six months as inflation spooked the positive mood in the industry.

As inflation crossed double digits and is now at close to 12 per cent, interest rates have been going up.

Logically, higher rates should help banks price their loans higher and protect their margins.

But more often than not, competitive pressures and political prompting force banks to delay this step

And there is usually a lag (ranging anywhere between a month and a quarter or more) between the general rise in benchmark rates (yields on government securities) and bank lending rates.

Yield impact

Although banks have hiked their lending rates, this has been neutralised by the increased cost of funds due to higher rates they pay on deposits.

Where the higher interest rates have hurt is the damage caused to the investment portfolio. During the past one year, yields have risen sharply. For example, on the benchmark 10-year government paper, yields have risen 1.5 percentage points.

As a consequence, almost every bank has had to provide huge amounts for depreciation of its investment portfolio (as prices of the securities and yields move inversely).

For instance, Canara Bank provided Rs 541 crore, Allahabad Bank provided Rs 264 crore, Indian Bank Rs 250 crore and Vijaya Bank about Rs 190 crore.

With more monetary tightening expected from the Reserve Bank of India (another 0.25 per cent hike in repo and cash reserve ratio seems likely), since inflationary pressures show no signs of abating, there is every possibility of banks encountering more pain in the remaining quarters.

Perhaps the one silver lining among the gathering gloom is the rather robust loan growth at 26 per cent.

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