Midsize Public Sector Banks Survive Downturn

2008-09 and the ongoing 2009-10 have not been easy years for the country’s mid to small sized public sector banks. Yet they have shown remarkable resilience in fighting back the downturn with all available tools at their disposal.

Good examples of this trend have been Bank of India and Central Bank of India on the big side, and Indian Overseas Bank and UCO Bank on the smaller side.

These tools include profit from treasury operations, profit from wholesale banking, cutting cost of deposits, and managing NPA levels.

Using these tools, as well as growth in their core banking business, Mumbai headquartered Central Bank of India’s net profit rose from Rs. 96.15 crore a year ago to Rs. 313.93 crore. The bank could better its treasury operations, as well as its wholesale and retail banking operations.

At another Mumbai headquartered major, Bank of India, the core metric of net interest income (NII) increased by 3.37% to Rs. 1409 crore. But BoI opted for higher provisioning for its NPAs this quarter, which pulled down its net. But since then, the new RBI directive of 70% Provision Coverage Ratio (PCR) has made the bank look wise among its peers.

Chennai based Indian Overseas Bank (IOB) could have posted an operating profit of Rs. 554.6 crore, but the exceptional case of the absorption of the loss making Shree Suvarna Sahakari Bank dragged down its net profit to Rs. 176.04 crore. IOB was handpicked by the Government earlier to save SSSB.

However, Kolkata based UCO Bank had a smoother sail this quarter. Net profit was up by 38.4% on strong growth in interest as well as treasury income. The bank is rapidly shedding its high cost bulk deposits, and managing its NPA levels quite well. Total income grew over 19%, while operating profit was up by around 50%. Now the bank is working hard to increase the competitive metric of net interest margin (NIM) to 2.15% from the current 1.88%.

Midsize Public Sector Banks Survive Downturn

SBT: Of Keralites, By Keralites, But Not For Keralites?

State Bank of Travancore is Kerala’s official bank if there is any such designation. It was created by eminent Keralites, and still thrives on Kerala’s huge NRI and domestic deposits. But when it comes to loans, SBT prefers to help corporates outside the state, often through big-ticket loan syndications. Ditto is the case with the bank’s customer service – winning accolades outside the state, and drawing flak inside Kerala. Is it something wrong with State Bank of Travancore or something wrong with Keralites? Are they expecting too much from their own bank?

Kerala headquartered SBT is not only a worthy child of the State Bank family. It is also a worthy adult with a mind of its own. Mergers are not something for State Bank of Travancore, which has taken into its fold not less than 10 banks during its 64 years of existence.

But this time, things would be different, no doubt, as it would be SBT which would be taken in by its parent since 1960, State Bank of India. But that merger is still far off, as SBI has prioritized the takeover of smaller, unlisted, and less healthy group banks than State Bank of Travancore like State Bank of Indore, State Bank of Hyderabad, and State Bank of Patiala.

SBT on the other hand is a listed entity, and has the unique credentials of never failing to make a profit and never failing to deliver dividends in its history.

But FY 2008-09 and the present year should be exceptions, anyone will agree. But at SBT, there is no need for such exceptions. For 2008-09, State Bank of Travancore registered a rise in net profit of 57.43% and a dividend payout of 130%. It was a record, and it clearly showed the bank team and its leadership could effectively rise up to the challenges.

And in 2009-10, this momentum only continues to gather steam with SBT posting a 337% rise in Q1 YoY.

SBT’s Managing Director AK Jagannathan is a veteran of the State Bank Group, having worked in State Bank of Mysore, State Bank of Hyderabad, & State Bank of Patiala, before taking up the assignment of Chief General Manager of State Bank of Travancore in October 2008 and later as its Managing Director. He is the perfect complimentary partner to SBI’s & State Bank Group’s Chairman OP Bhatt. Incidentally, Bhatt was the MD of SBT before moving to SBI in 2006.

State Bank of Travancore is known for its support for sensitive sectors, and was recently noted for surpassing its targets in delivering loans to farmers. At the same time, it caters to the diverse needs of its modern customer base. Recetly SBT tied up with Sundaram BNP Paribas to deliver their mutual funds through SBT branches.

State Bank of Travancore is a full service bank complete with core banking, internet banking, mobile banking, ATMs, home loans, vehicle loans, multi-city cheques, online tickets / bill payments, 3-in-one savings / demat / trading accounts, e-Tax, microfinance, MSME financing, reverse mortgages, and international credit / debit cards.

Owing to its presence in Kerala, SBT also has one of the most extensive NRI and Forex services in the country.

SBT: Of Keralites, By Keralites, But Not For Keralites?

Midsize Public Sector Banks Fight Downturn

2008-09 and the ongoing 2009-10 have not been easy years for the country’s mid to small sized public sector banks. Yet they have shown remarkable resilience in fighting back the downturn with all available tools at their disposal.

Good examples of this trend have been Bank of India and Central Bank of India on the big side, and Indian Overseas Bank and UCO Bank on the smaller side.

These tools include profit from treasury operations, profit from wholesale banking, cutting cost of deposits, and managing NPA levels.

Using these tools, as well as growth in their core banking business, Mumbai headquartered Central Bank of India’s net profit rose from Rs. 96.15 crore a year ago to Rs. 313.93 crore. The bank could better its treasury operations, as well as its wholesale and retail banking operations.

At another Mumbai headquartered major, Bank of India, the core metric of net interest income (NII) increased by 3.37% to Rs. 1409 crore. But BoI opted for higher provisioning for its NPAs this quarter, which pulled down its net. But since then, the new RBI directive of 70% PCR has made the bank look wise among its peers.

Chennai based Indian Overseas Bank (IOB) could have posted an operating profit of Rs. 554.6 crore, but the exceptional case of the absorption of the loss making Shree Suvrana Sahakari Bank dragged down its net profit to Rs. 176.04 crore. IOB was handpicked by the Government earlier to save SSSB.

However, Kolkata based UCO Bank had a smoother sail this quarter. Net profit was up by 38.4% on strong growth in interest as well as treasury income. The bank is rapidly shedding its high cost bulk deposits, and managing its NPA levels quite well. Total income grew over 19%, while operating profit was up by around 50%. Now the bank is working hard to increase the competitive metric of net interest margin (NIM) to 2.15% from the current 1.88%.

Midsize Public Sector Banks Fight Downturn

Why SBI Gets No RBI Waiver on NPAs, PCR

Does India's central bank, Reserve Bank of India, believe that nobody is too big to fail?

Post Lehman, post Merrill Lynch, & post RBS, the biggest joke doing the rounds in banking circles has been nobody is too big to fail. Because, whenever some wise mind tried to point out the risky games these giant banks played, the stock reply was, “Nah! Too big to fail”.

Now it seems that this newfound cautionary syndrome has caught up in India. The country’s central bank, RBI, often noted for its excellent and dynamic banking regulations has now come up with a stunner – all banks have to set aside funds to cover 70% of the total worth of bad loans. Technically called Provision Coverage Ratio (PCR) for Non Performing Assets (NPA), this has earlier been anything between 10-100%, with the average being 51%.

But some banks like, the country’s biggest – State Bank of India – always had a problem with this line of reasoning. Until recently, their PCR has been just 38.72%, and only on RBI prodding a couple of months back that it was hiked to the present 45.1%.

But Reserve Bank of India is still not impressed. There is no waiver even for the country’s largest bank that controls nearly one-fourth of Indian banking. SBI’s profitability is going to be hit, as the bank will have to set aside Rs. 3800 crore from their profits.

State Bank of India Chairman OP Bhatt has always maintained that his bank’s PCR is small due to the better quality of their NPAs. But conservative peers like Punjab National Bank (PNB) have set aside 90% and HDFC Bank has set 68%.

Anyway, why is Reserve Bank of India so adamant about 70% PCR? One reason might be the Indian banks’ aggressive new initiative to woo millions of home-loan seekers with an ascending interest rate pattern. SBI had pioneered this scheme, and received wide applause for it.

But this kind of loans where the interest burden starts light and gets heavier over the loan-term is said to be a major contributor to the subprime home-loan crisis in US.

Just imagine a couple in their 40s, taking a Rs. 40 lakh home loan in 2009. For the first four years, everything goes fine, and after that the higher interest regime sets in, just-in-time when their other burdens like children’s higher education / marriage sets in, and their employability and earning capacity decreases.

Is RBI foreseeing this scenario in India?

Why SBI Gets No RBI Waiver on NPAs, PCR

ICICI Bank's Real Turnaround Still Away?

There is nothing more sacrosanct than quarterly results. It separates the listed from the unlisted entities, the men from boys. Because, the latest quarterly results increases or decreases that revered number – TTM EPS – or trailing twelve months’ earnings per share, the ultimate metric that shows the investors what they are getting for their investment.

Take for example ICICI Bank. For the quarter ended September 2009, ICICI has come up with impressive numbers. Operating profit was up 18% QoQ and 6%YoY, net profit was up 2.6%, net interest margin (NIM) was maintained at 2.5%, net NPA was down 6.2%, and CASA deposit percentage was up to 36.9% from 28.7%.

On the whole it comes out as solid results. Even the stock markets reacted favourably, for a couple of days. Chanda Kochhar even began hoping for a bonus for her hardworking team this year. In 2008-09, they had missed their bonus, while at the end of 2007-08, then CEO & MD KV Kamath had been paid Rs. 43.24 lakh, while Kochhar reportedly was paid Rs. 22.44 lakh.

But a look at the quarter with more realistic glasses, yields a different set of results. Total income fell 12.7%, fee income declined 26%, loans contracted 14% YoY, net interest income was down 5% YoY, and ratio of net NPAs to loan assets rose from 1.9% to 2.36%.

More interesting are the positive numbers of net profit and CASA deposits. Headline profit was up mainly on a huge relative growth in treasury income, compared with Q2 of 2008-09. Then treasury was at a loss of Rs. 153 crore, while this time it posted a profit of Rs. 297 crore. And the real reason why CASA percentage rose was this – its total deposit base shrunk by 11.45%.

Not that ICICI Bank did any jugglery on these numbers. Anyone in their position would highlight the good figures and downplay the bad ones. But what matters is the way different media has opted to cover the numbers.

There was a core message in the real numbers of ICICI Bank, and it was this – the planned turnaround hasn’t started delivering in their core businesses.

Even worse is the impact the new provision control ratio (PCR) will have on ICICI Bank’s bottomline. The estimated Rs. 1800 crore extra provisioning required by the bank to meet the 70% PCR can wipe out around 35% of its current annual profits, some reports say.

ICICI Bank’s is not a lone case as far as confusing quarterly results is concerned. The media and the markets want to project the good side of friends. But the fact that, in India, quarterly results are still unaudited should be another cause for concern. Because of this, developed markets have started looking at EPS with suspicion, and instead looking only at Cash EPS, and the corresponding P/C, instead of P/E.

Not that Cash EPS can’t be tampered. It is difficult and would take a concerted Satyam like effort.

ICICI Bank's Real Turnaround Still Away?