Pricing power helps, but future is tense

Compared with the disappointing results coming in for manufacturing and services firms, headline numbers for banks in the December 2008 quarter have been fairly robust.

In an environment where money was tight, pricing power helped them deal with the higher cost of money. Moreover, falling bond yields boosted the value of their investment portfolios as did handsome amounts from fees. The best, though, may be behind them for now; growth is likely to shrink in the coming quarters and worse, non-performing loans are rising.

At a time when credit was scarce, most banks sustained their net interest margins(NIM) as they passed on the higher cost of money to customers. HDFC Bank, for instance, posted a sequential 10 basis points increase in NIM to 4.3 per cent, even though its cost of funds rose by close to 100 basis points.

Banks also made good money from fees, which jumped 50 per cent at Federal Bank, and 40 per cent at HDFC Bank. At Axis Bank, the rise was a smarter 57 per cent. What also boosted profits were falling bond yields — yields on gilts were down a steep 300 basis points.

That’s one reason Federal Bank’s operating profit, rose 129 per cent — driven by treasury gains, which were up 191 per cent. For Allahabad Bank, treasury profits accounted for 40 per cent of operating profits and the bottom line was bolstered by a write-back of mark-to-market depreciation of Rs 68 crore. IndusInd Bank earned nearly Rs 37 crore from treasury operations — the bank’s net profit for the quarter was Rs 45.06 crore.

Axis Bank’s 63 per cent increase in net profits to Rs 500 crore too was driven partly by a 56 per cent lower-than expected NPL provisioning and the write-back due to lower bond yields during the quarter. If not for this, pre-tax profit would have been sequentially flat.

What was more worrying at Axis Bank though was the 76 per cent y-o-y rise in gross NPLs and the lowest provisioning among private banks. According to Bank of America Merrill Lynch, “Axis Bank’s NPLs could rise 2.5 times between now and March 2010 on rapid loan growth averaging 64 per cent in the last couple of years and a high exposure to SMEs.”
 

ROBUST NUMBERS
In % change Y-o-Y	NII	OP	NP	Gross NPL	Net NPL
Axis Bank	24.40	35.31	63.24	76.03	45.97
Bank of Rajasthan	44.13	31.31	16.75	10.34	66.47
Federal Bank	88.80	129.32	98.11	26.47	37.37
HDFC Bank	37.68	36.74	44.81	120.47	119.58
IndusInd Bank	29.85	60.10	79.95	-35.93	-40.17
South Ind.Bank	57.85	46.63	33.10	-16.89	-10.47
St Bk of Bikaner	30.36	78.02	-18.05	-18.43	-16.17
St Bk of Patiala	40.60	57.23	236.23	-12.13	1.33
NPL- Non performing loans Quarter ended Dec ‘08                                                                                         Source: Capitaline

Another bank where growth in assets has been driven to a large extent by loans to SMEs is Allahabad Bank. Delinquencies are up at Federal Bank too—sequentially gross NPLs rose to 2.83 per cent. Even HDFC Bank, which boasts the cleanest book in the business, saw an uptick in gross NPLs.

A crop of banks, though, used the gains to clean up their balance sheets by making more provisions — at IndusInd Bank, gross NPLs were down to 1.8 per cent from 3 per cent at the end of September. At the State Bank of Bikaner and Jaipur, provisions rose 483 per cent, pushing down the net profit for the quarter.

Federal Bank, however, saw provisions falling sequentially. The bank reversed nearly Rs 100 crore on investment depreciation and Rs 20 crore of provisions on agri-loan waiver. The good news is that loan growth has started to moderate — incremental advances during the quarter were just Rs 200 crore compared with Rs 1,000 crore in previous quarters.

That should be the trend for the industry in 2009-10 when credit is expected to rise by just 15-16 per cent compared with 22 per cent in 2008-09. That should help improve asset quality, but margins could be under pressure.