Indian Banking Sector, Good Days Ahead
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With the interest rate cycle expected to reverse, the banking space is going to benefit going ahead. The simple reason is that the net interest margins (NIMs) of the banks may improve and the bond portfolio of the banks may have marked-to-market profit. Most of the banks have posted their Q3FY12 numbers and from that we have selected few of them so as to see how they have performed during the third quarter. One should note that the public sector major SBI is going to announce its result on February 13, 2012. For our study, we have chosen the following five key parameters to arrive at our conclusions:
• Net profit
• Net interest margin (NIM)
• Capital adequacy ratio (CAR)
• Provisions
• Net non-performing assets (NPAs).
| Net Profit (Rs / Crore) | | | |
|---|
| Banks | Q3FY12 | Q3FY11 | % Change |
| ICICI Bank | 1,728.1 | 1,437.02 | 20.26 |
| HDFC Bank | 1,429.66 | 1,087.83 | 31.42 |
| Axis Bank | 1,102.27 | 891.36 | 23.66 |
| Bank of India | 716.15 | 663.16 | 7.99 |
| Punjab National Bank | 1,150 | 1,090 | 5.50 |
| Union Bank of India | 197 | 579.57 | -66.01 |
From the above table we can see that HDFC Bank has been the one of the best performers among the others. The net profit of HDFC Bank increased by 31.42 per cent to Rs 1,429 crore. On the other hand, the net profit of Union bank of India (UBI) came in at Rs 197 crore versus Rs 579 crore as posted in a similar period last year.
| Provisions (Rs / Crore) | | | |
|---|
| Banks | Q3FY12 | Q3FY11 | % Change |
| ICICI Bank | 341.1 | 464.27 | -26.53 |
| HDFC Bank | 329.24 | 465.87 | -29.33 |
| Axis Bank | 422.33 | 313.88 | 34.55 |
| Bank of India | 693.07 | 497.94 | 39.19 |
| Punjab National Bank | 946 | 713 | 32.68 |
| Union Bank of India | 972.67 | 399.96 | 143.19 |
Banks usually make provisions when they see a delay in the repayment of loans. If the provisions of the banks are high it usually affects the profitability. The Union Bank of India made the highest amount of provisions which increased by 143 per cent to Rs 972 crore while ICICI Bank and HDFC Bank witnessed a decline in their provisions.
|
Net Interest Margin (NIM) (%) | | |
|---|
| Banks | Q3FY12 | Q3FY11 | Change (BPS) |
| ICICI Bank | 2.7 | 2.63 | 0.07 |
| HDFC Bank | 4.1 | 4.20 | -0.10 |
| Axis Bank | 3.75 | 3.81 | -0.06 |
| Bank of India | 2.55 | 3.09 | -0.54 |
| Punjab National Bank | 3.88 | 4.13 | -0.25 |
| Union Bank of India | 3.31 | 3.44 | -0.13 |
Banks usually make provisions when they see a delay in the repayment of loans. If the provisions of the banks are high it usually affects the profitability. The Union Bank of India made the highest amount of provisions which increased by 143 per cent to Rs 972 crore while ICICI Bank and HDFC Bank witnessed a decline in their provisions.Usually in a rising interest rate environment the net interest margin (NIM) of a bank gets affected. Contrary to this, ICICI Bank’s NIM improved by 7 basis points to 2.7 per cent. The worst performer in the group is Bank of India whose NIM contracted by 54 basis points to 2.55 per cent.
| Capital Adequacy Ratio (CAR) (%) | | |
|---|
| Banks | Q3FY12 | Q3FY11 | Change (BPS) |
| ICICI Bank | 18.88 | 19.98 | -1.1 |
| HDFC Bank | 16.3 | 16.3 | 0 |
| Axis Bank | 11.78 | 12.46 | -0.68 |
| Bank of India | 11.18 | 12.41 | -1.23 |
| Punjab National Bank | 11.48 | 11.9 | -0.42 |
| Union Bank of India | 11.72 | 11.88 | -0.16 |
HDFC Bank has maintained its CAR at the same level as compared to last year which is very commendable while Bank of India’s CAR worsened further, decreasing by 123 basis points to 11.18 per cent. Most of the PSU banks’ CAR has contracted, indicating their need for capital. The government has taken a step in favour of the banks and will infuse funds into most of them by FY12. Also, there is news that LIC is going to invest in Dena Bank and Syndicate Bank.
| Net NPA (%) | | | |
|---|
| Banks | Q3FY12 | Q3FY11 | Change (BPS) |
| ICICI Bank | 0.83 | 1.39 | -0.56 |
| HDFC Bank | 0.2 | 0.2 | 0 |
| Axis Bank | 0.39 | 0.29 | 0.1 |
| Bank of India | 1.78 | 0.88 | 0.9 |
| Punjab National Bank | 1.11 | 0.72 | 0.39 |
| Union Bank of India | 1.88 | 1.21 | 0.67 |
In a rising interest environment the asset quality of the bank usually deteriorates further. Contrary to this, ICICI Bank’s asset quality improved further while Union Bank’s asset quality worsened further, making it one of the poorest performers among its peers.
Overall, we feel that there still is pressure on the banks when it comes to asset quality. We believe that ICICI Bank and HDFC Bank are well-placed when compared to its peers. There is restructuring happening in cases where the banks have got the accounts of Kingfisher Airlines, Air India and other cash-trapped companies.
One should not forget to watch out for State Bank of India’s result. The SBI is the largest bank and its result and management guidance will provide cues going ahead. We believe that the banking space would be a good bet for the coming quarters but one has to be very cautions while investing. As an investor, it is necessary to look at the above five parameters before making the next move.