Private banks log higher profit growth in Q3

Indian banks have come through the December-earnings season in much better shape than was expected.

Though the market was concerned about rising costs reducing interest income, banks expanded net interest by 37 per cent, fuelling a 25 per cent growth in earnings.

Divergent trend

Private and public sector banks, however, showed divergent performance. The profit growth of private banks was 35 per cent, while the public sector banks managed only 21 per cent. IndusInd Bank, Indian Overseas Bank and State Bank of Travancore witnessed the strongest growth numbers at 74 per cent, 127 per cent and 158 per cent. .

Public sector banks had to provide not only for pension and gratuity liabilities, which put pressure on employee costs, but also for higher slippages, especially restructured assets. Rise in interest rates also depleted their investment book. The hike in standard-asset provisioning for teaser rates as mandated by the RBI has also dented banks' profits.

While public sector banks set aside 78 per cent more provisions this year as compared to the previous year, private banks saw provisions dip 28 per cent this time around. This was what made the difference to their bottomlines. Despite providing for loan losses, the net non-performing assets (NPA) ratio of public sector banks stood at 1.1 per cent against 0.6 per cent of private banks, for a similar ratio of gross NPA.

State Bank of India witnessed a doubling of loan-loss provisioning with the deadline for meeting its provision coverage nearing. In contrast, ICICI Bank's provisions declined 53 per cent year-on-year. Notably, the public sector banks had a 42 per cent growth in net interest income compared to 23 per cent growth posted by the private banks. This, viewed in the context of advances growth of 23 per cent for public sector banks and 27 per cent for private banks, is indicative of movement in the margins.

While private banks saw margins compress year-on-year, public sector banks managed to maintain strong margins. Majors such as SBI, Punjab National Bank, Bank of Baroda and Bank of India witnessed their margins expand between 28 basis points and 84 basis points to 3.29- 4.13 per cent. Deposits raised during the 2008 highs, which got re-priced coupled with higher proportion of retail deposits, helped them maintain their margins.

Outlook

From here on, banks may have to rely mainly on loan-book growth to drive net interest income as the margins compress. However, recent concerns raised by the RBI to bring down the credit-deposit ratios from 75.8 per cent will mean some moderation in credit growth, if deposits continue to be scarce. Banks, on their part, have significantly hiked deposit rates in the last few months, yet threatening inflation will mean the cost of funds will go up further. This might halt the high growth in profits witnessed over the last few quarters in the near term.

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