For the past two fiscals, Indian public sector banks relied on buoyant treasury income to overcome narrowing profit margins from regular lending activities. But now that the interest rate scenario has turned adverse, with bond yields on the rise?as implied by falling prices and, therefore, portfolio values?the banks have run into a strong headwind even there. This is reflected in their quarterly results. Net profits are down almost wherever you look. Canara Bank?s net dropped by 8% to Rs 464 crore, Andhra Bank?s net decreased 10.5%, Central Bank of India?s figure dipped by 14.7%, and Oriental Bank of Commerce posted losses on account of losses incurred by Global Trust Bank. The exceptions include Corporation Bank, which saw its net profit increase by almost 74%. The results of the big one, State Bank of India, are still awaited. Despite making some mark-to-market losses on its overseas financial investments, India?s largest bank is expected to post strong double-digit growth. Overall, for state-run banks, the fourth quarter of 2007-08 has been marred by a slowdown in credit growth, low interest margins and a drying up of treasury profits. In comparison, India?s private sector banks have beaten forecasts. ICICI Bank has recorded a rise in net profit of about 40%. It rode on healthy growth in net interest income, which rose 29% year-on-year, coupled with major savings on operating costs. Similarly, HDFC Bank posted a 37% increase in quarterly profit of Rs 471 crore, and reported a 56% increase in net interest income. However, the biggest surprises were Yes Bank, which posted a whopping 109% increase in net profit, and Axis Bank, with a 71% increase.
The difference is in the way private banks (and a couple of the public sector banks) have managed the cost of their deposits and margins. Most public sector banks had cut lending rates last quarter without reducing deposit rates. Some of them even offered concessions for bulk deposits. In almost all cases, the better-run banks have improved on their net interest income, even though they have had to factor in lower treasury income. Despite the noise about credit derivative losses, these have not poured too much red ink on balance sheets. But now with more capital provisioning required by Basel-II compliance, and a high interest rate scenario, differences among banks are growing sharper.