In financial year 2010-11, nationalised banks performed reasonably well as they could bring down their non-performing assets (NPAs) as a proportion of advances, and improved on their NIMs (net interest margins) and RoA (return on assets).

However, in the first quarter of 2011-12 the financial performance of nationalised banks has taken a beating. TheirNIM has shrunk by 30 basis points, gross NPA percentage has risen by 17 bps and their RoA has also fallen by 4 bps compared to the fourth quarter of 2010-11.

The stumbling blocks

A number of factors have contributed to the lacklustre performance. First, a series of hikes in policy rates which were undertaken in 2010-11 and followed up with an increase in repo rate by 75 basis points in the first quarter of 2011-12 seem to have started working their way through the system.

Second, nationalised banks were forced to do some bit of housekeeping in their NPA management. They have a mandate to migrate to ‘system-based tracking of NPAs' for their entire loan book by September 2011. Banks have adopted a phased approach to this.

After mapping the high-value accounts, now is the turn to recognise NPAs through systems for accounts below Rs 5 lakh and for sectors such as agriculture.

Identifying NPAs in agriculture is tricky as the NPA norm can extend beyond two years for certain crops. As the banks attempted to map a portion of low-value accounts to system-based tracking in the first quarter, it has resulted in identification of higher NPAs.

Third, industrial growth has started to moderate which is affecting credit demand. Given the high differential in rates home and abroad, companies are preferring ECBs to domestic bank borrowings.

Does the lacklustre performance hold across-the-board or have the larger nationalised banks displayed a different pattern when compared with the smaller peers.

As is known, there are 20 nationalised banks in India, including IDBI. The average business of the 19 nationalised banks, excluding IDBI, was Rs 2,73,210 crore as on March 2011.

Six bigger banks had a business figure that is more than the average, and the rest 13, lower than the average.

One can categorise the 19 banks into two groups — the bigger and the smaller based on the business mix criteria.

Large versus small

Let's have a snapshot of the performance of large banks vis-à-vis the smaller ones on both business and profitability indicators. One way of gauging performance of a going concern in a particular time period is to compare it with the corresponding period of the previous year.

However, year-on-year comparisons would make better sense for annual data than quarterly data. For quarterly data, it is easier to relate to what had happened in the previous quarter than three quarters back. Using y-o-y figures for quarterly data is akin to setting the reference period for comparison to a four year back period for annual data.

Compared to the quarter ended March 2011, in the quarter ended June 2011, we find:

While the loan portfolio of the large banks shrunk by 0.6 per cent, the same for smaller banks has actually grown by 1.1 per cent.

The deposits of large banks have grown at a much faster pace (1.4 per cent) compared to contraction for small banks (-0.03 per cent).

The Net Interest Income has fallen by a steep 8.4 per cent compared to a decline of 2.7 per cent for the smaller banks. While NIM of both small and large banks has shrunk, the degree has been much higher for larger banks, at 50 bps, compared to only 20 bps for the smaller banks.

While NPA for both the smaller and larger banks have increased in June 2011 compared to the March 2011 levels, the increase in Gross NPA for large banks has been a steep 27 bps and for the smaller banks it has been only 12 bps.

The growth in gross NPA for large banks was 4.1 per cent, 8.7 per cent for small banks and 9.9 per cent for the nationalised banks as group.

While operating profit for the large and small banks increased by 4 per cent and 1 per cent, respectively, the net profits declined by 11 per cent for the large banks and increased by 4 per cent for the smaller banks.

The decline in other income has been 16.2 per cent for the smaller banks compared to 24.3 per cent fall for the large banks. Operating expenses however increased by 3.4 per cent for the large banks compared to 8.8 per cent for the smaller banks.

The RoA of large banks has fallen by 15 bps compared to an increase of 1 bps for smaller ones.

There was an overall improvement in operating efficiency. However, the reduction in the average cost-to-income ratio was much larger for the large banks (11.6 per cent) compared to the larger banks (5.6 per cent).

The C-D ratio for the smaller banks has actually gone up compared to a fall in the case of larger banks. While the C-D ratio for smaller banks has gone up from 72.5 per cent to 73 per cent, for large banks it has come down from 74.3 per cent to 72.5 per cent.

Why the variance?

What explains this varied performance of smaller and larger nationalised banks? Though a number of factors might be at work, one can list out a few broad drivers of their performance.

While smaller banks had a deposit growth of 19.6 per cent in 2010-11, for large banks it was 23.8 per cent. As the term deposits become eligible for maturity, the re-pricing of these deposits is made on a larger portfolio for large banks compared to the smaller ones. This would have affected the cost of deposits of larger banks more.

The RBI, on May 3, announced an increase in the bank savings rate from 3.5 per cent to 4 per cent. As the fixed rate applicable on savings bank deposits was also raised by 50 bps, there has been some pressure on cost of deposits on this count in the first quarter of 2011-12. The pressure is felt more on the large banks which have a higher CASA share compared to the smaller banks.

Going forward, what can we expect on the performance of nationalised banks in the second quarter? The 50 bps hike in policy rates on July 26, 2011, coupled with the mandate to map the entire loan book to system-based identification of NPAs by September, will put pressure on credit growth, NII, NIM and NPA in the second quarter of 2011-12.

In these circumstances, nationalised banks would do well to consolidate their balance-sheet to show reasonable performance on the profitability indicators post-September.

(The author is Chief Economist, Bank of India. The views are personal.)

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