Pallavi Pengonda

Mumbai: In an environment that is becoming increasingly challenging by the day, twenty-six banks that have announced their results for the quarter ended March 2008 so far have fared pretty well.

These posted a 22.2% growth in net profit at Rs 7,422.87 crore from Rs 6,074.45 crore in the same period last year.

The data (sourced from CapitalinePlus) also shows that net interest income (NII) grew by a disappointing 7% to Rs 17,238.56 crore from Rs 16,099.60 crore. NII is the difference between interest earned (on loans etc) and interest paid (on deposits etc) for a bank.

At the same time, income from other sources grew by 22.3% to Rs 11,474.57 crore against Rs 9,376.71 crore. Other income includes income from fees earned on loan processing, commissions earned on selling mutual funds and insurance and treasury gains.

While this does not reflect well in terms of performance of the banks, what needs to be kept in mind is that earlier, banks used to account for amortisation expenses largely under provisions and contingencies and sometimes under other income.

RBI changed the accounting norm in the first quarter of 2007-08 and now banks have to account for amortisation against interest earned. Hence, to that extent, the above numbers are not comparable.

Amortisation is an accounting process where the premium paid on the security (i e the difference between its purchase and its redemption value) is set off against the interest earned on the security over the remaining period of maturity.

So, if a security with face value Rs 100, maturing in 5 years is purchased at Rs 110, the bank will have to provide (amortise) for the Rs 10 premium over the 5 year period against the interest earned on the security.

If the security pays an interest of Rs 8 per year (or 8%), then every year Rs 2 (Rs 105) will be reduced from the interest. This is because the redemption value of the security at maturity will be Rs 100.

An analyst who did not wish to be named said that, after adjusting for accounting changes, NII grew by around 13-14%, which is really not bad.

Interestingly, ten of these banks registered a decline in net profit compared with last year and all of them were from the public sector.

Abhijit Majumder, research analyst at Prabhudas Lilladher, says, “Some of the smaller public sector banks have not performed well, highlighting that the quality of earnings is not that great. However, results of Bank of India and State Bank of India (SBI) are good.”

Vaibhav Agarwal, research analyst of Angel Broking, says, “HDFC Bank and Axis Bank have performed well in terms of core performance while other banks have suffered.” His view is shared by Majumder as well.

Axis Bank’s net profit grew by 70.5% to Rs 361.40 crore helped by strong growth in advances and better net interest margins (NIMs), which rose 77 basis points (bps) YoY to 3.3%. NIM is NII expressed as a percentage of average assets of a bank.

The bank’s assets and liabilities profile improved. Its gross non performing assets (NPA) in percentage terms declined to 0.72% as on March 2008 from 0.95% as on March 2007 and net NPA dropped to 0.36% from 0.61%.

HDFC Bank’s NII growth of 55.7% to Rs 1,642.10 crore was helped by 35.4% increase in its core customer assets to Rs 70,400 crore and NIM expansion of 42 bps sequentially and 30 bps as compared to last year’s quarter.

ICICI’s numbers beat Street estimates, but its performance was driven by higher treasury gains (Rs 164 crore) and lower employee expenses. Staff expenses declined by 20% sequentially and grew at a slower pace of 6% YoY. The bank clearly is feeling the pressure as far as growth in its retail business is concerned.

Among public sector banks, Bank of India’s NII increased by 25.7% to Rs 1,216.82 crore outshining consensus estimates. Capital raised offset implications of higher costs of funds leading to steady margins and thus enabling good NII growth.

SBI net profit increased by 26.1% (above street expectations) to Rs 1,883 crore. Profitability was helped by almost flat operating expenses and 18% decrease in provision for taxes.

SBI’s asset quality deteriorated in the quarter — gross NPAs rose by 28.4% and net NPAs increased by 41.2%.

So, what next now?

Ravikant Bhat, research analyst at IDBI Capital says, “Margins for public sector banks are expected to be under pressure going forward.” There are further downside risks to credit growth and bank margins now. With inflation staying high, more CRR hikes are expected in this year, said Agarwal of Angel Broking.

Majumder says, “In the next 6-8 months, all banks except SBI will see pressure on their margins. SBI’s rights issue will help it expand margins.”

Source : DNA