Treasury blues for listed banks

The inevitable has happened. After a gap of 14 quarters, 36 listed commercial banks recorded a 6.58 per cent decline in net profit in the second quarter of 2004-2005 (July-September 2004) "" from Rs 4,572.46 crore in July-September 2003, to Rs 4,259.45 crore in the same quarter of 2004.

The last time these banks posted a dip in net profit was in March 2001.

The script was quite on the cards, what with banks' treasury profits on the decline for some time now. The treasury profits of 36 listed banks in the first half of the year went down sharply by 43.9 per cent "" or Rs 4,560 crore.

This is a reversal of the trend witnessed over the last few years. In the first half of 2003-2004, these banks' treasury profits rose by Rs 3,853 crore.

In fact, only five banks - Allahabad Bank, Indian Overseas Bank, Uco Bank, Union Bank of India and State Bank of India (SBI) - made treasury profits during the quarter, while Bank of Rajasthan, Federal Bank, ING Vysya Bank, Bank of Punjab, HDFC Bank, IDBI Bank and Kotak Mahindra Bank posted a loss.

All other banks posted a decline in treasury profits of between 10 per cent and 90 per cent.

Only one listed bank "" Jammu & Kashmir Bank "" is not included in this study as its treasury income data are not available.

The decline in net profit in the first half, however, has been due to the lower provisioning by banks for provisions and contingencies.

Provisioning on this count fell by 21.4 per cent or by Rs 1,700 crore in the first half of the year. Thanks to lower provisioning, SBI, Canara Bank, ICICI Bank, Indian Overseas bank, Oriental Bank of Commerce, Punjab National Bank (PNB) and UTI Bank reported net profit growth in the first half of the year.

(Click to view the chart on 'The Impact of Dwindling Investment Gains')

SBI, which posted a 13.3 per cent rise in first-half profits, lowered its provisions and contingencies by Rs 1,217 crore. PNB's net profit growth of 33.3 per cent is due to the lower provisioning of Rs 260 crore. OBC's provisioning was down Rs 258 crore, while its first-half net profits were up 29.6 per cent.

ICICI Bank's net profit growth of 17.7 per cent, too, was due in some measure to lower provisioning for contingencies. Of the 36 listed banks studied here, the net profits of 17 banks declined, those of eight banks rose by a single digit, while those of 11 banks climbed up by over 10 per cent each.

Only seven of the 36 listed banks have posted a growth in treasury income and five of them have recorded growth in treasury profit.

The seven banks that have shown a growth in treasury income are Allahabad Bank, Bank of Baroda, Syndicate Bank, State Bank of Bikaner and Jaipur, State Bank of Travancore, IDBI Bank and UTI Bank. The five banks posting a growth in treasury profits are Allahabad Bank, Indian Overseas Bank, Uco Bank, Union Bank and State Bank of Travancore.

But seven listed banks have actually made treasury losses and 24 of them have shown an erosion in treasury profits. Collectively, treasury income has dropped by 12 per cent _ from Rs 34,979.85 crore in the July-September 2003 quarter to Rs 30,657.22 crore in the July-September 2004 quarter.

The fall in treasury profit is much sharper "" 43.92 per cent from Rs 10,384.70 crore to Rs 5823.99 crore.

However, despite the drop in net profit in the first quarter, the overall net profit in the first half has grown by 5.1 per cent.

This is because in the first quarter (April-June) of 2004-2005, their net profit was up 19 per cent.

Only eight banks have recorded a growth in operating profit; 26 have seen an erosion. Two of them, Bank of Punjab and ING Vysya Bank, have posted operating losses.

The decline in Q2 net profit ranges from 4.62 per cent to an incredible 82.08 per cent. Only 33 per cent of the listed banks _ 12 out of the 36 that have announced their results _ have recorded a growth in net profits in this period.

Much of this was expected once interest rates started to rise. As a result of the fall in gilt prices and the rise in interest rates, or yield, bank treasury income _ the source of super-profits in earlier years _ has dropped drastically.

If treasury income crashed, it is because yields on government securities have started moving northwards and gilt prices southwards (the yields on bonds and bond prices move in opposite directions), drawing down the curtain on the low interest regime.

The yield on the 10- year benchmark bond, which had gone down to below five per cent in October last year, has now crossed seven per cent.