Gaining currency

Net interest income growth to drive bank valuations

Now that the days of easy money have long gone, and banks can no longer show hefty profits by selling government securities at fat profits, it's back to the bread-and-butter lending business for banks.

But with overall bank credit growing at a year-on-year (y-o-y) rate of 32.9 per cent (according to the Reserve Bank of India's latest weekly statistical supplement), banks should have had no difficulty in lending more.

What matters for banks, however, is not just their lending volumes, but their net interest income, that is, interest earned less interest expended.

But, as the table shows, the y-o-y growth in net interest income (NII) in the last quarter has been rather uneven for banks. 
 

NET INTEREST INCOME GROWTH
Bank	June qtr	Mar qtr
Allahabad Bank	24.80	3.80
Andhra Bank	2.40	14.50
Bank of Baroda	11.10	40.00
Bank of India	3.80	-ve
Bank of Maharashtra	7.80	29.50
Canara Bank	11.60	25.90
Corporation Bank	0.70	16.60
Dena Bank	13.90	32.40
HDFC Bank	31.30	42.40
ICICI Bank	35.00	44.40
Indian Overseas Bank	10.50	11.20
PNB	16.30	5.50
SBI	19.90	19.20
Syndicate Bank	37.80	19.60
UCO Bank	12.80	2.40
Union Bank	14.60	32.90
UTI Bank	33.10	17.90

In the first place, the 32.9 per cent overall rate of growth is misleading, because it includes the effect of the IDBI-IDBI Bank merger.

Adjusting for that, the y-o-y rate of growth of credit in scheduled commercial banks works out to 17.9 per cent, as on July 22.

As is to be expected, many banks have bettered that rate.

As the table shows, the rate of growth in NII for most banks has slowed from the March quarter. One reason is perhaps the fact that the cost of deposits has increased.

While the ranking of banks by growth in NII has changed (Bank of India's NII is low because the bank includes bond amortisation costs in interest expended, unlike other banks), what's more important is identifying those banks that have consistently beaten overall credit growth during the past two quarters. These are HDFC Bank, ICICI Bank, SBI, Syndicate Bank and UTI Bank "" these should outperform the other banks going forward.

Stock prices and EPS

How deep is the connection between current stock values and "fundamentals"? One way of answering the question is to look at the y-o-y growth in earnings per share (EPS) in Q1 FY06 for the Sensex stocks and compare it with y-o-y growth in the respective stock prices as on date. 
 

% GROWTH IN STOCK PRICES
Company	June Qtr	Mar Qttr
ACC	67.41	83.93
Bajaj Auto	67.69	10.38
Bharti Tele-Ventures	94.63	68.75
BHEL	89.11	59.98
Cipla	36.10	34.59
Dr Reddy's Labs	3.87	-48.66
Grasim Ind	18.57	5.71
Gujarat Ambuja Cement	55.75	39.05
HDFC	56.53	21.45
HDFC Bank	79.66	30.79
Hero Honda	34.00	8.45
Hindalco	26.90	47.21
Hindustan Lever	38.61	-22.24
ICICI Bank	75.38	21.81
Infosys Technologies	48.73	46.24
ITC	64.83	36.38
Larsen & Toubro	62.15	71.62
Maruti Udyog	24.09	53.37
ONGC	32.73	58.33
Ranbaxy Laboratories	7.56	-44.15
Reliance Energy	8.64	62.76
Reliance Ind	43.97	53.04
Satyam Computer Services	47.50	28.80
SBI	76.32	16.41
Tata Motors	12.43	37.81
Tata Power	58.34	11.04
Tata Steel	43.78	64.20
Wipro	27.82	50.52

Two Sensex stocks, namely Tata Consultancy Services and NTPC had listed on the bourses well after the June quarter '04, hence they have not been included in the analysis. Stocks that have run up at a lower rate than their earnings growth include four-wheeler and commercial vehicle manufacturers, oil & gas, and metal stocks.

Analysts, however, highlight the specific concerns pertinent to these three sectors that has led investors to be prudent "" in the case of oil and gas sector, no clear cut subsidy formula has been worked out and in the case of autos, sales growth has slowed considerably over the past few quarters.

On the other hand, banking, FMCG and pharmaceutical stocks have grown faster than earnings growth, thanks to investors' expectations of continued earnings buoyancy in the medium term.

With contributions from Amriteshwar Mathur