Who have weathered the rate hikes better - Private or public sector banks?

Indian economy has now entered into the present cycle of rising interest rates for the 18th month.

Between March 2010 and August 2011, policy rates have risen by 325 basis points; 200 basis points of this increase came during the financial year 2010-11 and the rest in financial year 2011-12.

Barring the latest increase of 50 basis points on July 26, the first quarter of 2011-12, witnessed a rise of 75bps.

SB rates

Further, the fixed interest rate applicable for the SB deposits was also increased by 50 bps on May 3, 2011 after a gap of eight years.

It is expected that increase in policy rates and the SB rate will have a negative impact on NIM and NPA and in turn on the profitability of the commercial banks.

What do the numbers for nationalised banks (NBs) and new private banks (NPBs) which account for close to 90 per cent of the assets of the Indian banking system suggest.

For both these categories of banks taken together, NIM has fallen from 3.3 per cent in quarter ended March 2011 to 3.1 per cent in the quarter ended June 2011. The gross NPA percentage has increased from 2.01 per cent to 2.10 per cent.

Both NII and other income have fallen by 5 per cent and 16 per cent respectively. As such, the ROA has fallen from 0.95 per cent to 0.90 per cent.

Other issues

Apart from legacy issues, one finds significant difference between nationalised banks and new private banks in their different 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.

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 42 per cent of operating expenses for the NPBs as compared to 66 per cent for the NBs.

Non-interest income as a proportion of operating expenses was 76 per cent for NPBs and only 52 per cent for the NBs.

Given these differences, how have the NBs and the NPBs fared in the Q1 of 2011-12.

Performance

First, NPBs had a higher credit growth (2.4 per cent) than deposit growth (0.4 per cent). For NBs it was just the opposite. Deposit growth was 0.7 per cent and credit growth just 0.16 per cent. In fact, the large NBs had a negative credit growth (-0.6 per cent)

Second, the decline in NIM has been 10 bps for NPBs compared to 28 bps for the nationalised banks. Thus, the difference in NIM of NPBs and nationalised banks which was 38 bps in March 2011 has increased to 56 bps in June 2011.

Third, the most striking difference has been in the area of NPA management. The gross NPA as a per cent of advances has actually declined for the NPBs where as it has increased for the NBs.

The increase in NPA levels by 6.2 per cent for the NBs should be seen in the perspective of the move to bring the smaller accounts also under system tracked NPA system. In a situation of rising rates, there is a greater probability of occurrence of NPAs because of adverse selection of borrowers and loan servicing capacity of the borrower coming under pressure when inflation continues to be a problem.

Fourth, for the quarter ended March 2011, the RoA for NBs and NPBs were 0.88 and 1.12 per cent respectively. In the June quarter, the RoA for both NPBs and NBs has declined and the decline has been more for NPBs (6 bps) compared to nationalised banks (4 bps).

Fifth, while the C-D ratio for NPBs have increased by 1 per cent during the first quarter, it has fallen by 0.1 per cent for the NBs. Higher credit orientation in an atmosphere of rising rates indicates the greater risk appetite of the NPBs.

Sixth, NII has declined for both the categories of banks but the degree of decline has been me more for the NBs. Other income for both categories of banks has declined with the extent of decline much sharper for the NBs as compared to the NPBs

Seventh, while operating expenses has declined for both the NBs and the NPBs, the extent of decline is much higher at 22.4 per cent for the NBs compared to only 1.5 per cent for the NPBs.

The sharp decline needs to be seen in the context of higher provisioning for employees in the fourth quarter of 2010-11. Infact, employee expenses have been reduced by 27 per cent for the NBs as opposed to a 5 per cent increase for the NPBs. The same pattern holds also for the Non-employee related operating expenses. For the NBs it was -12 per cent where as 10 per cent for the NPBs.

The first quarter results suggest that the NPBs have done better than the NBs in protecting their NIM and RoA. In the second quarter also, all banks will face pressure on their business and profitability indicators given the macroeconomic conditions.

In these circumstances, a moderation in the risk appetite of NPBs can serve them better whereas NBs need to give special emphasis on generation of non interest income and improving their CASA business and be prompt in NPA recovery.

The author is Chief Economist, Bank of India. The views expressed are personal. >swarupmisra@gmail.com

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