Banks' Profit Growth Trails Income

Banking sector has been hit by rising cost of funds. According to an analysis of 47 banks in the listed domain, interest income has gone up by 35%, while profits grew by only 24% for Q2’08. In comparison, growth was 37% in topline and 46% in bottomline for Q1’08. The decline in profit growth is despite nearly 45% increase in other income. While private sector banks outperformed with 47% growth in income, public sector enterprises also showed a decent performance with 30% growth.

On the cost front, banks have been hit by a sharp rise in interest expended, which rose by as much as 50%. As a result, average cost of deposit has increased from 4.75% to 5.08%. Interest expended now accounts for 70% of interest income, up from 62% in Q2’07. As a result, gross profit rose by 23% despite lower increase in staff and other cost.

An important change has been a lower-than expected increase in staff costs for most PSBs, even though new generation private sector banks saw a sharp rise in staff cost because of large recruitment to meet their aggressive expansion targets.

Despite the slower profit growth, there has been an improvement in some of the balance sheet items. While net NPA has declined to 0.8% from 1.1%, PAT to net worth has increased sharply to 15% from 9%. Further, 18 out of 47 banks showed an improvement in capital adequacy ratio (CAR). 23 out of 47 had their CAR above 11% as against the regulatory minimum of 9%.

A differentiating feature between private and public sector banks has been growth in advances, which was around 55-60% for private against 40-45% for PSU Bank. Private sector banks have further increased their share in aggregate non-interest income, to 24% from only 15% in September ’06. Private banks have been more aggressive in their fee-based activities like letter of credit and guarantees. As a result, their share in contingent liability is also quite high.

Among major banks, SBI saw a profit growth of 36%, against growth of 32% in interest income. The bank gained from a near-constant staff cost, which helped it outperform the aggregate set in terms of profit growth. In the private sector, ICICI Bank saw a growth of 44% in interest income, although profit growth slowed to 33% due to cost pressure under all heads.

Results of half year ended September 2007 have witnessed improvement in operating income/average asset ratio and provision/average asset ratio as compared to previous year. Moreover, interest expended cost/operating income has marginally improved from 52% to 53%. shikha.sharma1@timesgroup.com