The macroeconomic environment in India has deteriorated in the second quarter of 2011-12 as revealed from growth slowing down considerably to 6.9 per cent from 7.7 per cent in Q1 and inflation remaining stubborn at close to 10 per cent.

What does the performance of the nationalised banks (NBs) and new private banks (NPBs) which account for more than 65 per cent of the assets of the Indian banking system suggest in this difficult macro environment?

For both these categories of banks taken together, NII and other income have risen by 8.5 per cent and 6.8 per cent respectively in Q2 on a sequential basis viz, in Sep quarter over June quarter. NIM has also improved by 9 basis points.

Thus, despite increase in gross NPA percentage by 20 basis points, RoA has improved by 2 basis points in the September quarter on a sequential basis. This aggregate picture, however, could mask the varied performance which the NBs and NPBs might have displayed when seen in isolation. There is merit in comparing and contrasting the performance of NBs and NPBs because in addition to legacy issues, one finds significant difference in their business orientation, technology adoption and operating efficiency.

The NPBs had a much higher share of CASA at 34.25 per cent as compared to only 31 per cent for the NBs as on March 31, 2011. NPBs have a higher C-D ratio of 83 per cent compared to only 72 per cent for the NBs.

Employee expenses are much less at 41 per cent of operating expenses for the NPBs as compared to 64 per cent for the NBs as on Sep 2011. Non-interest income as a proportion of operating expenses was 76 per cent for NPBs and only 53 per cent for the NBs. Given these differences, how have the NBs and the NPBs fared in the Q2 of 2011-12. We consider five major performance indicators NIM, business growth, NPAs, cost to income ratio and RoA.

Net interest margin

While most banks (17 out of 19) in the NB category experienced a rise, half of the banks (3 out of 6) witnessed a decline in the Sep 2011 quarter over June quarter in their NIMs. This can be contrasted with the behavior of NIMs in the June quarter when 11 out of the 19 NBs and 5 out of 6 NPBs witnessed a dip over the March quarter.

Thus improvement in NIM was of a much higher order for the NBs (0.14) compared to that for NPBs (0.09) in the Sep quarter. Notwithstanding the improvement, the pricing power of NPBs remained quite strong in the September quarter. The difference in NIMs of NBs and NPBs which had risen from 38 bps in the quarter ended March 2011 to 56 basis points in June quarter though has reduced a bit but still remains at 51 basis points.

Business Growth

Both credit and deposit growth was of a higher order for the NPBs than for the NBs. However, deposit growth outpaced credit growth for both categories of banks. Thus, C-D ratio has fallen for both the NBs and NPBs as deposit growth has been higher than credit growth in the Sept quarter. Sectoral Credit Deployment data published by the RBI for Sept 2011 reveals that unlike a sharp deceleration seen for large corporate credit, personal loan segment especially housing and vehicles have seen good credit growth till the Sept quarter. The NPBs have been able to post a higher credit growth than NBs in an elevated interest rate environment is because of their relatively higher retail orientation.

GNPAs

Asset quality of NPBs (2.24 per cent) was worse compared to NBs (1.93 per cent) as on March 2011. However, one finds steady deterioration in the asset quality of NBs in the June and Sep quarter. For the quarter ended Sep 211, one finds gross NPA percentages of NBs are at a much higher level (2.36) than that for the NPBs (2.12). The increase in GNPA of NBs can be appreciated as many of them migrated to a system recognition of NPAs for their entire asset book which brought out the dust under the carpet.

Cost to Income Ratio

The cost to income ratio for NBs had shot up to 51.8 per cent in the quarter ended March 2011 as they made additional provisions towards the second pension option. Cost to income ratio for NBs has consistently improved in the subsequent two quarters. However, for NPBs, there has been deterioration in this ratio in the September quarter and it is observed at 50.3 compared to only 43.7 for the NBs.

A look at the constituents of this ratio reveals that it is the relatively lower growth in NII for the NPBs (6.9 per cent) compared to the NBs (9 per cent) that has kept their cost to income ratio much higher. Despite a slightly better growth in interest income for NPBs(9 per cent) compared to the NBs(7 per cent), it is the steep increase in interest expenses for NPBs(10 per cent) compared to NBs(6 per cent) which has led to the subdued growth in NII for NPBs.

Return on assets

While around half of the banks in both the NB and NPB category suffered a decline in RoA in the Sep quarter, the average RoA for both NBs and NPBs sequentially improved by 2 bps and 3 bps respectively. As such, the wedge between, the RoA of NPBs and NBs remained at the same 62 basis points in the quarter ended June 2011 has increased marginally to 63 bps in the Sept quarter.

Way Forward

The banks would be declaring their results for the third quarter during January-February 2012. The macro environment in the third quarter has become more challenging. The RBI has also asked all banks to adopt the system recognition of NPAs by October 31, 2011. Quite a number of NPBs and also quite a few NBs which are yet to fully migrate to the system recognition of NPAs would be doing the needful in the Q3. One can very well expect some of the best bets in the banking industry to throw some surprises on their NPAs and earnings in the third quarter results.

(The author teaches Economics at Xavier Institute of Management Bhubaneswar. Views are personal. >swarupmisra@gmail.com )

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