Corporates have frequently relied on other income to boost bottomlines in difficult times. In the case of banks `other income' has taken on a different connotation. A high other income figure for a bank means that it has successfully evolved its business model to add more revenue streams. And, judging by the emerging order, the very success of banks could depend on diversification of revenue streams for relying on traditional business model of borrowing low, lending high and off for golf at five is fraught with risk.
Strict provisioning norms for non performing asset (NPAs) have ensured that banks do not resort to indiscriminate lending. The increased emphasis on credit worthiness has resulted in competition for bluechip clients which has lead to narrowing of spread_ interest income minus interest expended. The severity can be gauged from the fact that spread, as percentage of total assets, for public sector banks has declined from average of 3.22 in 1991-92 to 2.81 per cent in 1998-99. Over the same period, squeeze has been even more severe for private sector banks i.e. from 4.02 to 2.09.
With spreads narrowing, bank bottomlines could take a sever beating if other revenue streams are not added. Some of the far sighted banks have already anticipated this problem and moved on to add more non-fund based activities. One clear benefit of having a higher fee based income is that margins are much higher. Take the case of Centurion Bank and ICICI Bank in terms of contribution of other income to total income. As against 18.5 per cent for ICICI Bank this contribution is only 8.4 per cent for Centurion Bank. Consequently, the gross profit margin for ICICI Bank is 24 per cent against 20 per cent for Centurion Bank.
Another advantage of having non fund based revenue streams is that even if bank has to make a hefty provision its bottomline does not suffer. Take the case of Global Trust Bank. Despite a hefty provisioning of Rs 139.41 crore the bank managed to return a 53.3 per cent growth in net profit.
Hence, the fee based income not only improves margins but also provides stability to earnings.
But at the same time the composition of other income is also crucial. A high per cent age of fee based income is desired over a high contribution from treasury operations which could be volatile in nature. In balance, it can be said that banks cannot depend on interest income alone and in future other income, namely fee based activities, treasury and trading activities will be as important as interest income. `The Smart Investor' takes a look at some of the early achievers.
Global Trust Bank
If other income, as percentage of total income, is a pointer the ability of a bank to adopt to the emerging order then Global Trust Bank (GTB) has left its peers
far behind. For the year ended March 2000, the other income, read fee based income, was up by 59 per cent to Rs 232.7 crore as against Rs 146.32 crore for the year
ended March 1999. In contrast, the interest income grew by 31.6 per cent from Rs 491.36 crore for the year ended March
1999 to Rs 646.42 crore for year
ended March 2000. And more significant than the growth or the absolute figure of
Rs 232.7 crore is the fact that other income accounted for 26.5 per cent of the total income.
The healthy growth in non-fund based activities has helped the bank report a 53.5 per cent increase in bottomline to Rs 108.62 crore. This has been possible because of emphasis of the bank in offering value added products and services to its customers. And, judging by the performance of last quarter of FY 2000 wherein income
from fee based activities grew by 87.8 per cent to Rs 90.12 crore form Rs 47.98 last year, the momentum is going to increase in coming year.
Meanwhile, having covered retail customer in its first phase of its Internet Banking Programme, launched in
December 1999, in the second phase GTB wants to create a nation wide payment network of major banks. It has already tied up with some of the nationalised banks enabling an account holder to purchase a draft payable at centres where it has these tie ups. The bank would soon be
launching debit cards in India for which it is holding negotiations with Master Card and Visa. A fresh investment of Rs 50 crore has been earmarked for setting up of Transmission Switch, the technology required for the debit card. And to expand reach, the ATM network is being expanded to 100 by the end of the year and 250 by December next.
In March this year, the bank made a private allotment of 1,48,00,000 equity shares of face value of Rs 10 each at a price of Rs 85 per share, aggregating Rs 125.80 crore, to various financial institutions and mutual funds. Also, one of the existing shareholder of the company, International Finance Corporation (IFC) converted its convertible loan of $ 5 million into equity shares at a price of Rs 85 per share yielding 25,59,000 equity shares. The equity infusion has taken the networth of the bank to beyond
Rs 500 crore. This was the only criteria that the bank had not met in terms of setting up an insurance venture. GTB is a clear long term winner.
ICICI Bank
ICICI Bank, the first Indian bank to be listed on the New York Stock Exchange (NYSE), has been at the forefront of innovation offering value added services and products regularly. The emphasis on fee based income has resulted in a 302.1 per cent growth in other income to Rs 89.91 crore for the quarter ended March 2000 and 117.9 per cent growth to Rs 194.05 crore for the year ended. March 2000.
Boosted by other income, the bank has posted a 65.4 per cent increase in total income to Rs 1,046.9 crore for the year ended March 2000 from Rs 633.08 crore for the year ended March 1999. The net profit, despite a hefty provisioning of Rs 108.52 crore, has increased by 66.2 per cent to Rs 105.3 crore.
In the last fiscal, the bank had made an international offering of 1,59,09,090 American Depository Shares (ADS) at US $ 11 per ADS with underlying two equity shares. A total of US $ 175 million was raised through this international offering and would be used for funding future
growth plans. These plans are mainly targeted at changing the image of ICICI being a corporate bank to a retail bank. This
retail thrust would be achieved through a increased branch network. As on
March 31, 2000, the Bank has a network of 81 branches and 16 extension counters. The bank also has a network of 175 ATMs, spread across 47 centres in 17 States
and Union Territories, which is to be extended to 500.
The bank has already launched an Electronic Bill Presentment & Payment service through its internet banking service, Infinity. This service offers the convenience of paying bills from the utility companies on the net. It is mainly because of these innovations that the bank has been able to increase the number of Internet Banking customers from 4,000 to 1,10,000 last year. This could be significant as cost of branch banking can be almost ten times that of net banking. Moving on, the bank recently entered into a tie up with cellular service provider in Mumbai and New Delhi to offered mobile banking service to its customers credit card holders.
Apart from steady organic growth the bank is not averse to acquiring some other private bank. At one point it was believed to be close to taking over Centurion Bank but the deal fell through. It may acquire a bank that not only adds to its branch network but also helps it to enter new business area. Even if it does not acquire another bank there is no doubting its technology driven growth model that is increasingly focused on fee based activities.
