Banks September quarter net profits stand up to 20.2%, look for more margins

In the September quarter most of the banks did not have any substantial gain from core business but have made good amount of treasury and other income.

According to September quarter results declared by 37 banks – in line with analyst guess, the aggregate net profit stood up to 20.2%.

The net profit grew mainly because of other income plunged 44% year on year, with government bonds prices moving up.

While calculating the net profit banks are allowed to include notional gains on investments such as income earned on bonds to 'other income', this process is known as marking to market. The line is reversed when bonds prices fall.

On the other hand the net interest income (NII), or the difference between interest earned and interest paid, the core business income for banks increased to 7.9% year on year basis in comparison to last year 38% jump during the same period.

However that is over the June quarter, NII rose to 8.4%, mainly because of improvement in loan disbursements.

Amongst the banks the State Bank of India, India's largest by market capitalization, has reported a 10.2% jump in net profit, while its NII grew by just 2.81% on year-on-year basis.

ICICI Bank, the second largest bank net profit was insignificant up to 2.56% due to lower non-interest income. While its NII declined by 5.2%, as bank disbursed 14% less loans in the quarter.

Fewer loans were disbursed as ICICI had adopted the strategy to reduce exposure to the so-called "unsecured" retail loans and instead focused on corporate lending.

"Bank earnings have been a mixed bag. Several banks have shown an increase in treasury profits leading to improved bottom lines," said Vaibhav Agrawal, senior analyst-banking at Angel Broking.

Banks which benefited the most from a rise in other income include Central Bank of India (other income up 332.4%), Allahabad Bank (208.5%) and Canara Bank (163.6%).

Suresh Ganapathy, analyst with Deutsche Bank said the net profit results of some public sector banks haven't been up to mark.

"Higher treasury profits and lower provisioning has helped them to achieve higher net profit," he said.

Few of the banks which made profit as their core business did well include IDBI Bank (core income up 106.2%), IndusInd Bank (98.2%), Vijaya Bank (35.53%), South Indian Bank (31.27%) and Axis Bank (25.86%).

But one area which remains of concern is asset quality.

"A lot of the loan growth can be attributed to liquidity, which is not a healthy trend," according to an analyst with the domestic brokerage, not wishing to be named.

Thus net non-performing assets or bad loans of 37 banks are up by 25% on a year on year basis.

On a chronological basis, or over the June quarter, bad loans have increased by 1.12%.
"Asset quality declined at some public sector entities such as Bank of India," said Aggrawal.

The banks faced loss due to default in repayments on some retail loans and on loans to real estate and export-oriented sectors.

But the companies were able to moderate the debt burden through equity-based fund-raised by corporates in the quarter.

Praveen Sood, CFO of Hindustan Construction Company stated many realtors paid their debts through QIP proceeds. "A lot of liquidity was also made available through various other measures so that also helped," Sood said. HCC's current debt estimates to Rs 2,200 crore. Furthermore, analysts are expecting improvement in interest income and margins if credit offtake picks up. But it will all depend on the Reserve Bank of India's (RBI) new directive, which can impact profitability.

The central bank told banks must achieve at least 70% provision coverage by September next year for their bad loans.

According to analysts this will strike net profit by 3% to 4% on a back-of-the-envelope basis as all banks combined will have to provide for around of Rs 1,2000 crore to meet coverage ratio.

The central bank will be issuing more detailed guidelines on this. "It would be premature to take this into consideration right now, therefore," said Ganapathy.

According to Aggarwal the earnings growth in the third quarter, is not going to be much strong.

He observes credit growth in the 15-17% range. Ganapathy concurs. "Margins will improve going forward on account of re-pricing of bulk deposits in the coming two quarters, which will reduce cost of funds," Ganapathy said. He is expecting Bank of Baroda, PNB and HDFC to perform much better over the next one year.