It’s other income rather than the interest generating part of the banking business that has driven profits in the second quarter.
Most banks have seen only a marginal rise in net interest income
MUMBAI: It’s other income rather than the interest generating part of the banking business that has driven profits in the second quarter.
An analysis of the results of 30 banks shows that aggregate profits grew by 22.22% in the September 2007 quarter (over the same period last year) to Rs 6,362.9 crore.
However, aggregate net interest income (NII or interest earned on loans minus the interest paid on deposits) increased by only 11.25% to Rs 14,833.36 crore.
This shows that profits were helped by other income (fee based income and treasury gains), which increased by 40.42% to Rs 8,394.6 crore.
The Q2 results of State Bank India (SBI) follow the pattern. While the NII increased by 6.3% to Rs 3,762.92 crore, net profit rose by 36% to Rs 1,611.42 crore. It was other income which came to the rescue, increasing by 42% to Rs 2,041.94 crore.
Other banks that have seen a considerable rise in other income are AXIS Bank (87%), IDBI Bank (121.32%), Indian Bank (67.47%), Kotak Mahindra Bank (95.85%), State Bank of Hyderabad (60.51%), State Bank of Mysore (71.22%), UCO Bank (91.94%), Union Bank of India (77.61%), Yes Bank (109.9%) and Punjab National Bank (64.72%).
For most banks, NII has grown slowly. At the same time, NIM (NII expressed as a percentage of average assets during the quarter) has gone down.
Shahina Mukadam, head of Research at IDBI Capital, says, “NIMs have been under pressure as the cost of funds has gone up. However, good growth in other income has reduced the pressure on NIMs.”
Take the case of SBI, the NIM for the six months ended September stands at 2.84%. Even as SBI has not disclosed separate NIMs for Q2, it’s NIM for Q1 FY08 stood at 2.97%. This suggests that the NIM this quarter is lower. This can be attributed to the lower NII growth.
Banks are facing a huge challenge owing to the overall credit-growth slowdown because of rising interest rates.
At the same time, owing to competition, they haven’t been able to cut interest rates on deposits, leading to slower growth in NIIs.
Moreover, because of the higher interest rates on fixed deposits, more depositors are putting money in them rather than letting it sit idle in current and savings account
(CASA) deposits.
A higher share of CASA deposits means banks have access to cheaper funds, improving margins.
In the case of SBI, the CASA ratio as on September 30, 2007, slipped to 37.13% from 41% in Q1 FY08.
A slightly comforting performance came from ICICI Bank, which posted a 33.9% rise in NII to Rs 1,786 crore.
Pathik Gandotra, Nilesh Parikh and Neha Agarwal of SSKI, in a report dated October 19, say: “The bank has used its capital issue proceeds to retire part of the high-cost deposits. Aided by 45% growth in current account deposits, ICICI’s CASA ratio has improved by 300 basis points to 25%.”
HDFC Bank enjoys one of the best CASA ratios in the banking space. Its CASA for Q2 stands at 52.5%. Punit Srivastava, analyst from ENAM Securities, in a report dated October 12, 2007, says, “HDFC Bank’s net profit grew 40% YoY during Q2FY08, driven by 48% growth in NII.”
Analysts expect that the credit slowdown would linger for some time. Till then, looks like other income will be the saving grace.
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