Cost of funds, fee income to drive bank profits in Q2

With bond yields hardening, bankers say they will not be able to look to their trading rooms for high profits.

Just as treasury income boosted banks’ bottom lines in the first quarter of 2009-10, interest income and fee income are expected to help them post healthy profits in the second quarter.

Moreover, gains are likely to come from supply-side factors such as lower cost of funds as credit growth is still subdued.

“Lower cost of funds will drive profits. For the industry, the cost of funds will be half-a-per cent less than in the previous quarter and spreads will be marginally better,” said MM Agrawal, deputy managing director of Axis Bank, the country’s third-largest private sector lender.

Banks, which were offering more than 10 per cent per annum on deposits of more than one-year maturity, have slashed rates to 6.5-7.75 per cent.

In the first quarter, the country’s largest lender, State Bank of India (SBI), reported a net profit of Rs 2,330 crore, aided by pre-tax treasury income of Rs 4,075 crore.

The country’s second-largest lender, ICICI Bank, recorded a net profit of Rs 878.22 crore on the back of treasury gains of Rs 714 crore.

However, with yields on government securities hardening over the past quarter, bankers say they will not be able to look to their trading rooms for high profits. “Rather than trading income, net interest income and fee-based income, both from corporate and retail operations, will contribute to profit,” said Agrawal.

According to a senior official with Dhanalakshmi Bank, fluctuations in bond yields were not drastic in the first two months while there was volatility in September. The contribution of treasury income to the bottom line might not be high compared with the levels in the first quarter, he added.

“Our cost of funds has come down by 20 basis points in Q2 as compared to Q1,” said Bank of India Chief Financial Officer VKR Aggrawal. “The net profit will be driven by interest income and fee-based income in the second quarter. Unlike in the first quarter, treasury income will not play any role,” he added.

“There has been a reduction in cost of funds, but most of that has been passed to clients. So, there should be a marginal benefit on that count,” said Rana Kapoor, managing director and chief executive officer of Yes Bank.

Analysts said the effect of lower deposit rates would not show in the second quarter. “The margin improvement due to lower deposit rates is not expected to kick in till the second half of the year,” said Vaibhav Agrawal of Angel Broking.

However, some bankers said that due to a subdued growth in credit, treasury income would continue to play a significant role.

A Citi report on September 30 said trading gains, aided by a surge in bond and equity markets late in the quarter, were likely to be the earnings driver for Indian banks.

A senior SBI official said treasury income would remain the key contributor to the bank’s bottom line. The net interest margin is expected to remain flat at 2.3-4 per cent. Banks will be able to defend margins on account of reduction in cost of funds and improvement in interest payments, especially from borrowers whose payments had turned irregular due to the downturn.

There was also better recovery from non-performing accounts that would be a part of our other income, he added.