Private lenders focus on cost control to improve earnings

A shift in focus of banks towards improving efficiency and utilisation rates resulted in a decelerated rise of operating expenses for most private lenders in the October-December quarter as against the year-ago period

Private sector lenders are keeping a tight leash on staff cost and administrative expenses to improve earnings growth in the current uncertain macroeconomic environment. The rise in operating expenses of most private banks decelerated in the October-December quarter compared with the year-ago period, as they shifted focus on improving the efficiency and utilisation rates.

HDFC Bank, the second largest private sector lender, reported only 3.8 per cent year-on-year rise in operating expenses during the third quarter. It allowed the bank improve its cost-to-income ratio to 42.7 per cent at the end of December 2013 from 47.2 per cent a year earlier.

Paresh Sukthankar, deputy managing director of HDFC Bank, said, "The revenue growth from interest and fee income helped our earnings. But profit was clearly boosted because of tight cost control. We were able to hold expenses’ growth under four per cent. We decided to tap into operating efficiency and focus on improving productivity. In this environment, it is natural to focus more on cost control.”

The bank's headcount has reduced by around 1,500 employees in the past year, which allowed it to cut staff cost from a year before. It closed the quarter with a workforce of 68,200.

Axis Bank also managed to keep staff cost under control, despite employee count increasing by 5,000 in a year. The country’s third largest private sector bank’s staff cost increased by 6.5 per cent on a year-on-year basis in October-December, compared to the 13.5 per cent rise in the corresponding period of 2012-13.

"With slower growth in operating expenses, the bank's core operating profit and net profit have also shown healthy growth," Axis Bank said in its quarterly earnings statement.

The growth in operating expenses of IndusInd Bank has also slowed, to around 22 per cent from about 30 per cent, in the last few quarters. "Branch break-evens are reaching a stage that the ratio of the new branches to total branches is falling. When that happens, operating expense takes a downward trend," Romesh Sobti, managing director and chief executive told analysts after third quarter earnings.

The lender has also improved its cost-to-income ratio sequentially by 75-77 basis points. It is currently around 47 per cent and the bank aims to improve it to 45 per cent in 18-24 months.

"For a balanced universal bank like us, a cost-income ratio around 45 per cent would be sort of an ideal ratio. So, I think, sustainability is around the cost-income ratio. Operating expense will not see any large blips now and then," Sobti said.