Its deuce, for private and public sector banks

Written by Madan Sabnavis | Updated: May 31 2009, 06:03am hrs
Fiscal 2008-09 was a difficult time for banks as it was the second successive year of the financial crisis that engulfed the world economy. While India was partly insulated from the crisis, the meltdown was felt through capital transfers and trade, thus affecting growth. Banking became more conventional and prudential norms acquired a new dimension with income and profits being affected. To lend or not to lend is the question, as there are surplus funds but they are hard to come by.

The purpose here is to assess how Indian banks have performed in this environment, which will probably explain the current paradox. Ten leading banks have been considered here: ICICI Bank, Axis Bank, HDFC Bank, Kotak Bank and YES Bank, which are leaders in the private sector and SBI, BoB, Canara, Bank of India and Union Bank, in the public sector. They have been ranked on eight parameters.

The first set of indicators include growth in net interest income, other income and operating income to capture the operations of core banking activities. The second set of indicators are profit based and include growth in operating profit, net profit and change in net profit to total income ratio (sum of net interest income and other income). Other profit ratios such as return on assets or EPS have been excluded to avoid double counting. The third set comprises prudential indicators such as change in gross NPA and capital adequacy ratios. Capital adequacy is a tricky concept; as while a ratio higher than Basel-II recommendations is desirable, it also reflects the extent of under-banking. However, for this purpose it is assumed that higher ratios are desirable as it reflects the potential for further business expansion.

Each of the banks has been ranked on the parameters and the bank with the lowest sum of ranks is the leader.

1. The aggregate performance of public sector banks was better in terms of growth in profits. While private banks registered higher growth in NII, PSBs were better in increasing their 'other income' which comprises fee and treasury income.

2. NPAs tended to increase sharply for private banks, while public sector banks witnessed a more modest increase in this ratio. SBI, BoB and Union Bank had a decline in the gross NPA ratio.

3. Capital adequacy ratio increased sharply for ICICI, HDFC, Kotak and YES Bank, which could be attributed to a decline in growth in assets. ICICI had actually compressed its balance sheet to improve this ratio.

4. Segment wise revenue reveals that ICICI Bank and BoB operated evenly in the wholesale, retail and treasury segments. Axis was overly dependent on treasury for its income (59%), while YES Bank focussed on wholesale (57%) and HDFC on retail (45%) banking. SBI, Canara, Bank of India and Union Bank had turned distinctly from retail to wholesale focus in 2008-09.

Tables 1 and 2 provide information on the indicators for the banks and the ranking of the same with the consolidated rank.

Based on Tables 1 and 2 it may be seen that

1. The leader in this group has been YES Bank which benefited from size as growth rates were robust due to the smaller base. The topper otherwise is Bank of Baroda which has done well on the profits and prudential areas.

2. Axis Bank at number three has done well on all fronts except operating expenses which have risen sharply.

3. The next two positions have gone to Bank of India and Canara Bank, which have both had median scores in all respects. Bank of India was however the topper in other income.

4. HDFC at number six has done well with the top line, but has fallen in the median range in case of the other parameters including expenses.

5. SBI and Canara Bank were at number seven and eight respectively, where the performance was ordinary. SBI did well in other income, while Union Bank was impressive at reducing NPAs.

6. ICICI and Kotak were disappointments in most respects. ICICI however, was the leader in lowering its expenses. Kotak had borne the brunt of both, lower growth in top line, profits and higher NPAs.

To conclude, it may be stated that NPAs or the fear of the same is one factor that could be slowing down credit today. Banks have reverted to conventional corporate banking (retail and treasury are not that attractive as before); and the focus on operating expenses underlies the compulsion of inelasticity of interest rates. Capital adequacy ratios are robust, which provide hope that lending could be better in this year. Banking surely will be quiet this year with the treasury and mortgage business taking a back-seat.

The author is chief economist, NCDEX Limited. The views expressed are personal