Q3 shows pricing power’s back for banks

MUMBAI: State Bank of India’s announcement of a 4.5% drop in net profits during the third quarter (Q3) ended December, 2006, seems to suggest that bank margins may be under pressure due to rising borrowing costs. The BSE Bankex fell 2.17% on Tuesday, fearing a reversal in bank fortunes.

However, a quick analysis of 17 banks’ Q3 results by DNA Money shows that the industry has more or less managed to maintain its margins. Compared to the September quarter, banks’ net interest income (NII) as a percentage of total interest earned was down only marginally from 36.89% to 36.34%.

What this suggests is that they are recouping by way of higher lending rates most of what they are giving away as higher deposit rates. In other words, most banks have displayed greater resilience and pricing power despite rising costs. 

This implies that even if interest rates continue to rise, as they certainly will in this quarter and possibly the next, they should be able to shield their margins. One major driver behind this pricing power has been robust credit growth, with year-on-year bank credit growth still staying above 30%.

A broad pattern, however, seems to be emerging whereby the private sector banks seem to be doing better than the public sector banks in protecting interest margins (See table). 

In recent quarters, banks have had to provide more for depreciation in the value of investments rather than non-performing assets (NPAs). Gautami Desai, UTI Mutual Fund’s banking analyst, says that banks need not worry about enlarged provisioning in the medium term as companies are doing well.

“New NPAs will not crop up in a longer economic cycle.”

If there is a common thread running through both public and private sector banks it is this: their Q3 results are marked by vigorous growth, especially in the topline.

And the primary factor behind this has been the growth in interest income.

Says Jyoti Khatri, banking sector analyst with KR Choksey Shares and Securities: “Growth in interest income has been possible because of the healthy growth in advances.”

And, of course, because of the hikes in effective lending rates. Most banks have reduced sub-PLR lending in the face of strident loan demand. Khatri is thus upbeat. “You can expect better numbers in the years to come.”

To be sure, the results available so far may change as more nationalised banks announce their results in the coming week. There could be both pleasant and unpleasant surprises. Says Vishal Goel, banking sector analyst with Edelweiss Securities: “It is better to wait until the numbers of Punjab National Bank and a few other smaller public sector banks are out before an inference is drawn (on the whole sector).”

All said and done, the Q3 numbers of the 17 banks considered so far indicate three things. One, loan growth has been robust. Two, investment gains have been supporting the bottomline. Three, provisions have moved up. But margins are holding so far, despite blips. The next quarter will thus be crucial.