With State Bank of India announcing its annual audited financial results for the year-ended March 2011, the result season for the commercial banks is now over.

The PSBs and the new private banks (NPBs) constitute about 90 per cent of the assets, thus, representative of the banking system. Within the PSB space, the major players are the 19 nationalised banks (NBs) and the SBI. While drawing any comparison between the NBs, SBI and the NPBs, it would be instructive to recall their own peculiar history which has a bearing on their performance.

Legacy

The erstwhile Imperial bank, a private bank, was nationalised in 1955 and was christened State Bank of India. SBI operates as the substitute for RBI where the central bank does not have a physical presence. SBI has the largest branch network and its government business operations are massive. Unlike SBI, the major private banks of the day were nationalised in two tranches in 1969 and 1980, to further inclusive banking. They, like SBI, pursue both socialistic and commercial objectives.

New private sector banks as a category was a creation of the mid-1990s when the government wanted to infuse technology in the banking system. The new private sector banks have come up as a big force in the banking system as they do not have any legacy to carry. They are, from their very inception, technologically well equipped to meet the multifaceted needs of modern day business. Though the NBs and SBI have done a good bit of catching up in the past 15 years on the technology front, there is marked difference in the clientele catered to by the PSBs and NPBs. The NBs and the SBI have major presence in the rural and semi-urban areas and they cater to all class of customers whereas the NPBs serve the high-end customers.

Do the difference in their history and complexion, affect their performance? As a starting point to answer this question, a look at the balance sheet and profit and loss account of the various categories of banks would be enlightening. What do the results of the various bank groups reveal? If we consider the Return on Assets (RoA), the most important indicator of profitability, the new private banks have outsmarted both the nationalised banks and SBI in 2011. While RoA for SBI declined from 0.88 per cent in 2009-10 to 0.71 per cent in 2010-11 that for nationalised banks declined marginally to 0.98 per cent from 0.99 per cent and the same for NPBs increased significantly from 0.86 per cent in 2009-10 to 1.39 per cent in 2010-11.

A comparison of the RoA of the NBs and NPBs also need to take into account the higher provisioning made by NBs on account of AS-15 (superannuation related provisions) in 2010-11, a legacy cost. Notwithstanding the higher provisions made by NBs, what explains this varied performance between them and the NPBs? Profits depend on both the level of business and how well the business has been carried out. While the business growth of the NBs and NPBs were of the same order of 26.2 per cent, SBI's growth in business was muted in 2010-11 at 17.7 per cent. When we consider the composition of business mix, both deposits and credit of NBs grew around 26 per cent while for the NPBs, credit growth at 28 per cent was significantly higher than their deposit growth of 24.5 per cent in 2010-11. For SBI, credit growth was around 20 per cent whereas deposit growth was much slower at 16 per cent. The investment portfolio of SBI declined marginally whereas that for NBs and NPBs increased by 16 per cent and 22 per cent respectively.

Pricing power

The pricing power of banks also has a bearing on profitability. NIM captures the pricing power of the banks. How do the different bank groups fare on the NIM count. The NPBs outperform both SBI as well as the NBs when it comes to NIM. Though in the financial year 2010-11, the NIMs of all the categories of banks have increased, the difference in NIM of NPBs from that of NBs is significantly higher and that from SBI is also appreciably high. The NIM depends on cost of funds and yield on advances. The cost of funds of banks with a higher share of CASA is relatively lower. On this count, the NPBs are slightly better placed than the NBs although there is wide variation in the CASA ratio for individual banks in each category of the banks. For instance, the CASA deposits for the NBs vary from as 20 per cent to 40 per cent with the average being 31 per cent as on March 2011. For the NPBs, the range of CASA deposits is still wide, varying between 10 and 51 per cent. The average being 34.25, marginally higher than that for NBs. The SBI has the highest CASA ratio of 48.6 per cent as on March 2011. With CASA share not being significantly higher than those of NBs, it must be the case that the NPBs as a group are able to lend at better rates than their NBs peers.

Growth in net interest income was highest for the NBs at 47 per cent compared with a growth of 24 per cent for the NPBs and 37.5 per cent for SBI. Non-interest income of the NBs declined by 4.5 per cent in 2010-11 whereas it increased by 2.5 per cent for the NPBs and 5.7 per cent for SBI. The income from treasury operations declined for SBI as well as 11 of the 19 NBs. Also five out of the seven NPBs registered a decline in income from treasury operations. The general decline in the treasury income is along the expected lines as interest rates moved up in tune with the policy rates. It would be appropriate to mention that RBI increased the policy rates 8 times beginning with March 2010 during the course of 2010-11. Growth in employee expenses was highest for the NBs at 41.5 per cent compared with only 13 per cent for SBI and 33 per cent for the NPBs. Operating expenses grew by around 33per cent for both the NBs and the NPBs. For SBI, the growth in operating expenses was much lower at 13 per cent.

The NBs as a group score much better in asset management compared with the NPBs and SBI. Asset quality measure by the gross NPA was much lower for NBs at 1.88 per cent compared with 2.24 per cent for NPBs and 3.28 per cent for SBI. However, the improvement in asset quality measured by the reduction in the GNPA was the most for NPBs, followed by SBI and the NBs. Notwithstanding, the better performance at reduction in GNPA, the levels of GNPA remain significantly higher for SBI and NPBs. Although, there has been significant improvement in the cost to income ratio for SBI, it was a marginal improvement for NBs and status quo for NPBs in 2011 compared with 2010; this measure of efficiency hovered around 48 per cent for all the three categories of banks. Thus, the data does not support the popular belief that NPBs are more efficient compared with the PSBs.

A look at the balance sheet and financial figures of NBs and NPBs reveal that it is not the higher efficiency or better asset quality of NPBs which drive their higher profitability but it is their pricing power. For, SBI, it is the poor asset quality which has dragged its performance in 2010-11.

(The author is Chief Economist, Bank of India. The views expressed are personal and not of the institution he belongs to.)

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