Wednesday March 13, 11:45 AM
Private Banks: Operating profits hit |
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By Equitymaster.com
The private banking sector reported stellar performance during the December quarter of FY02. Income from operations grew at a strong rate of 30% and profits excluding provisions doubled during the quarter. We have covered five major private sector banks - HDFC Bank (HDBK.BO, news) , ICICI Bank (ICBK.BO, news) , Global Trust Bank (GTB), UTI Bank (UTBK.BO, news) and IDBI Bank (IDBK.BO, news) in our sector study.
| (Rs m) |
3QFY01 |
3QFY02 |
Change |
9m FY01 |
9m FY02 |
Change |
| Income from operations |
12,143 |
15,802 |
30.1% |
34,293 |
44,941 |
31.0% |
| Other Income |
2,097 |
4,496 |
114.4% |
4,922 |
11,836 |
140.5% |
| Interest expense |
8,891 |
11,498 |
29.3% |
24,841 |
33,058 |
33.1% |
| Net interest income |
3,251 |
4,304 |
32.4% |
9,452 |
11,883 |
25.7% |
| Other expenses |
2,751 |
3,943 |
43.4% |
7,122 |
10,952 |
53.8% |
| Operating Profit |
501 |
361 |
-28.0% |
2,331 |
931 |
-60.0% |
| Operating Profit Margin (%) |
4.1% |
2.3% |
|
6.8% |
2.1% |
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| Provisions and contingencies |
285 |
1,943 |
580.8% |
1,469 |
4,313 |
193.5% |
| Profit before Tax |
2,313 |
2,914 |
26.0% |
5,784 |
8,455 |
46.2% |
| Tax |
732 |
923 |
26.2% |
1,526 |
2,675 |
75.3% |
| Profit after Tax/(Loss) |
1,581 |
1,991 |
25.9% |
4,258 |
5,780 |
35.7% |
| Net profit margin (%) |
13.0% |
12.6% |
|
12.4% |
12.9% |
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| No. of Shares (m) |
833.4 |
941.4 |
|
833.4 |
941.4 |
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| Diluted Earnings per share* |
6.7 |
8.5 |
|
6.0 |
8.2 |
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| P/E Ratio |
|
13.4 |
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13.9 |
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| *(annualised) |
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Except Global Trust Bank all other private banks covered in our sector study posted a healthy growth in interest income. GTB's core business income declined by 14% and profits dropped by 74% in the third quarter on the back of erosion in operating margins and a sharp rise in non-performing assets (NPAs) provisions. The bank is facing challenging business conditions.
The sector's income from operations' growth was driven by higher income from investments. Save for IDBI Bank, all other banks reported a relatively better growth in investment income. With softer interest rates, bond prices soared up and banks opted to lock in profits on government securities held by them. This was reflected from a triple digits rise in other income figure. The proportion of other income to total income increased to 22% during the quarter from a mere 15% in the corresponding previous quarter.
Despite a sterling growth in income, the sector's operating profits took a hit and declined by 28%. Pressure on interest margins and higher operating expenses depressed operating profit growth of the sector. HDFC Bank and ICICI Bank in particular witnessed a more than proportionate rise in interest cost. Even though cost to income ratio of private banking sector declined to 45% from 51% in 3QFY01, it still stands on the higher side compared to growth in total income.
All private banks increased provisioning amount for non-performing assets substantially in the third quarter. This could be to increase the NPA coverage. Also, slowing industrial activity could have contributed to rise in this figure. Effective tax rate at 31.7% remained constant in 3QFY02. A significant rise in provision figure contributed in lowering the earnings growth of the sector.
Private banking sector gets a P/E multiple of 14x 9m FY02 earnings at current valuations. This is significantly higher compared to a valuation of 4x accorded to PSU banking sector. Private banking sector has been opened up for foreign investment with increase in FDI limit to 49%. This fueled stock prices of most banks in the sector in expectations of a strategic stake sale by these banks.
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