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Madan Sabnavis

THE honeymoon for banks is not yet over. They continue to reap benefits in the government securities (G-Sec) market. But how long will this go on? Are all banks in the same rut or are some working on more prudential lines? To know more about the vulnerability levels of banks, the half-yearly performance of a sample of 23 banks across all the sectors has been reviewed based on five parameters.

The net profit growth of these banks was a high 43 per cent, from Rs 3,497 crore in the first half of last year to Rs 5,005 crore in the corresponding period this year. The interesting point is that while `other income' rose by Rs 3,057 core, net profits moved up by Rs 1,508 crore.

Had the `other income' to total income ratio had remained unchanged at 13.1 per cent instead of 16.6 per cent, then former would have fallen by Rs 1,869 crore, which is higher than the increase in net profit — that is, the net profit would have fallen. It is not surprising, therefore, that the RBI has reiterated that it is not worried about falling yields.

The new private sector banks are more vulnerable, because of their more efficient treasuries. ICICI Bank has the highest ratio of `other income' to total income (31.8 per cent) followed by Indus Ind (28.2), UTI Bank (20.3) and GTB (18.9).

While Vysya Bank's ratio is 26 per cent, those of Bank of India and UCO are 18 per cent and 17.9 per cent respectively. The other leading private bank, HDFC Bank, has prudentially worked on a ratio of 17.4 per cent, which is a shade higher than the sector average of 16.4 per cent.

Now, there are two components of `other income': Fee and treasury. Usually, around 70 per cent of the total is fee income, but half-yearly results do not disclose the same. Maybe, the RBI should consider making it mandatory for banks to disclose this break-up in their quarterly results too.

The second parameter to judge vulnerability is the ratio of provisions (excluding taxes) to operating profit. This ratio brings out the hidden problems in a bank and a higher ratio of provisions to operating profit speaks more of the mess that still needs to be sorted out. For the sample, it rose from 36.1 per cent to 43.9 per cent, pushed up mainly by Dena Bank (a 97 per cent increase) and ICICI Bank (86.2 per cent).

Higher provisions mean that the accounts are not in order. Dena Bank is just about coming out of the red, while ICICI Bank has to cover up the NPAs of erstwhile ICICI Ltd. In fact, this is also indicative of the mess the banking system will be subjected to once IDBI becomes a commercial bank. For most banks, barring JK, HDFC, Syndicate and PNB, this ratio fell.

The third important variable is the cost-income ratio. This throws more light on whether banks are doing the right things internally.

For the sample, this ratio, in general, fell from 54.1 per cent to 47.5 per cent. However, in the case of UTI Bank (34.7 per cent to 44 per cent), IDBI Bank (42.1 to 60.9), GTB (56.1 to 74.1) and Vysya Bank (53 to 56.9) the ratio increased; for HDFC Bank and State Bank of Hyderabad the rise was marginal.

The ratio of interest expenditure to interest income is reflective of efficiency in the use of funds. With competition increasing and the focus being directed towards retail credit, a rate war has ensued, leading to a trade-off between growth and prudential returns. Further, heavy investments in government paper have led to capital gains but a fall in interest income.

A rise in this ratio is another danger signal for a bank, as it means interest margins getting squeezed. For the sample, it remained virtually unchanged at 69.2 per cent.

In only two cases has the ratio gone up — ICICI Bank (from 68.8 per cent to 86.2 per cent) and Indus Ind Bank (85.9 to 91.5). In ICICI Bank's case, the rise could be as a result of the pains of hasty conversion into a universal bank, when borrowing at high rates and SLR investments in low-yielding bonds had to be undertaken.

For Dena Bank (97.5 per cent), UTI Bank (81.3 per cent) and Vysya Bank (79.2 per cent) the ratio has fallen but remains high. For the other banks, it is around the sample average.

The last indicator is profits. Banks always talk of return on net worth. This is warped because, when short on capital a higher return can be scored. Some of the smaller public sector banks, which are yet to be listed, have low capital and, hence, high return on capital. Therefore, net profit to total income is more appropriate, as it shows the profit earned on every rupee of income. For the sample, this ratio rose from 7.8 per cent to 9.3 per cent. Only two banks — ICICI Bank (11.4 per cent to 7.8 per cent) and IDBI Bank (10.4 to 7.8) — witnessed declining profit margins.

What do all these convey? First, public sector banks are less vulnerable than private banks and present a steady picture. The latter has over-invested in non-core banking activity and reaped gains.

The regulator should be concerned, as speculative gains in banking is playing on capital receipts of banks (deposits), and not the income of individuals, when the same is transacted on the bourses. ICICI Bank, UTI Bank, Vysya Bank, GTB and Indus Ind are extremely vulnerable to shifts in interest rates, which could be catastrophic.

New private banks also have unfavourable interest ratios, and ICICI Bank's profit margins have fallen because of higher provisioning — the banking system will have to bear the brunt of this for a few more years as a correction takes place.

lso, this is an indication of what the new universal bank, IDBI, could mean for the system.

(The author is an economist with L&T. The views are personal.)

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