Public sector banks' profits dip, private ones grow strongly

Public sector banks (PSBs) have seen a drop in profits in the latest June quarter for the first time since December 2009.

PSBs that declared their results until Friday witnessed a 3.2 per cent fall in net profits due to a 54 per cent jump in provisions and shrinking net interest margins.

Private sector banks, in contrast expanded profits by 31 per cent in the latest June quarter, though they also faced margin pressures. The Net Interest Income (NII) growth for PSBs and private banks was 14 per cent and 19 per cent respectively.

Leaning on traditional banking

PSBs' higher dependence on lending activities (net interest income contributed 80 per cent of net revenues) proved to be their undoing, even as private banks relied more on fee income. Net interest margins of all banks shrank in the June quarter with a sharp rise in borrowing costs, partly due to higher savings bank interest; which was not fully matched by yields on loans.

A fall in ‘other income' contribution and rise in provisions too hit profits. Among PSBs, Vijaya Bank, Punjab and Sind Bank, State Bank of Mysore and Canara Bank reported the highest decline in profit.

PSBs rely significantly on treasury activities for ‘other income' and this quarter was particularly severe on them in terms of treasury losses as interest rates spiked.

For instance, Canara Bank incurred trading losses of Rs 77 crore this quarter compared with Rs 223 crore profits from this source a year ago.

Private banks managed to maintain profit growth at 30 per cent-plus levels which they have been clocking for quite some time now. The new-age private sector banks, led by ICICI Bank, reported the best growth rates.

While most private banks also felt the heat of shrinking margins, they saw reduced provisions (lower by 33 per cent) and higher fee income. For them ‘other income' brought in a third of their revenues.

Provision problems

PSBs saw provisions spike due to higher provisions on restructured assets and depreciation on the investment book. The shift to system-based recognition of non-performing assets also led to higher slippages.

For instance, Union Bank of India witnessed NPA provisions jump from Rs 100 crore in June 2010 to Rs 365 crore in the June 2011 quarter. PNB witnessed its provision for investment depreciation going up from Rs 14 crore to Rs 134 crore.

Private banks, due to adequate provisioning and smaller investment book, managed to reduce their provisions.

Asset quality woes

Asset quality continued to remain a problem for PSBs. The gross NPA ratio deteriorated to 2.1 per cent from 1.9 per cent as of March 2011 as the banks neared their deadline to migrate towards system based NPA recognition.

Restructured assets also took a toll on overall asset quality. Bank of India, Central Bank of India, Punjab and Sind Bank, State Bank of Bikaner and Jaipur and State Bank Travancore have all witnessed their gross NPAs rise 20 per cent sequentially.

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