Quarterly GDP growth slided all through the four quarters of 2011-12 to touch a nine-year low of 5.3 per cent in the January-March quarter. The growth concerns prompted the RBI to reduce the benchmark repo rate by 50 basis points in its Annual Policy statement on April 17, 2012.
The transmission of the reduction in policy rates to the deposit and lending rates, however, was asymmetric. While modal base rate of commercial banks declined by 25 bps, the modal deposit rate declined by only 2 bps in the June quarter.
The stickiness in deposit rates reflects interplay of factors such as tight liquidity and high inflation in Q1 of 2012-13.
It may be noted that growth in both deposits and advances for the banking system at 13.4 per cent and 16.5 per cent in Q1 has been below the RBI’s indicative projection of 16 per cent and 17 per cent, respectively, for 2012-13.
Banks taken for study
How did the different bank groups perform in this difficult macro environment?
Here we take stock of how the peer banks have performed in the June quarter of 2012-13. The peer banks have a pan-India presence and account for 33 per cent of banking business.
The peer banks include Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI), Canara Bank, Union Bank of India (UBI), IDBI Bank and Central Bank of India (CBI) in the decreasing order of their business mix.
We have considered five indicators of performance — business growth, asset quality, efficiency, pricing power and, above all, profitability. While business growth embraces the deposit and advances portfolio of the bank, the other four dimensions are represented through gross NPA (non-performing asset) as a percentage of gross assets, cost-to-income ratio, NIM (net interest margin) and RoA (return on assets) respectively.
One way of gauging performance of a going concern in a particular time period is to compare it with the corresponding period of the previous year. However, year-on-year comparisons would make better sense for annual data than quarterly data.
For quarterly data, it is easier to relate to what had happened in the previous quarter than three quarters back. Using y-o-y figures for quarterly data is akin to setting the reference period for comparison to a four-year-back period for annual data. As such, we have reported performance on a sequential basis. There is also reference to the y-o-y figures which is the most popular form of reporting by banks
Business Growth
While deposits grew by 0.7 per cent, advances declined by 0.8 per cent in the June quarter for the peer banks as a group on a sequential basis. As such, the first quarter experienced muted business growth overall. However, on a y-o-y basis, deposit and advances grew by 14.6 per cent and 17.5 per cent, respectively, and overall business growth was 15.8 per cent.
NIM
As interest expenses grew at a faster pace (6.8 per cent) than interest income (4.5 per cent) on a sequential basis, NII fell by 1 per cent in the June quarter.
Hence, peer banks as group witnessed a decline in NIMs by 14 bps on a sequential basis. The best performer in the pack is PNB which has the highest NIM and also has posted an improvement on a sequential basis.
On a y-o-y basis, NII increased by 13.2 per cent and NIM improved by 11 bps. Only BoI and IDBI have improved their NIMs on a y-o-y basis. However, it may be noted that these two banks had very low NIMs a year back compared to the other members in the group.
NPA
In terms of asset quality measured by percentage of gross NPAs, BoB has performed the best and Central Bank of India, the worst. On a sequential basis, both in absolute as well as in percentage terms, all the peer banks have reported higher NPA figures for the June quarter.
Absolute gross NPA of the peer banks has increased by 14.2 per cent on a sequential basis and 67 per cent on a y-o-y basis. Gross NPA percentages increased by 39 bps and 97 bps on sequential and y-o-y bases, respectively. Gross NPA percentages have also increased for all the banks except BoI on a y-o-y basis. Not only there has been higher reporting of absolute NPAs by all the members of the peer group but also there has been higher incidence of restructured assets.
Restructuring though helps the banks report lower NPAs but they have to provide for the diminution in the value of the loan and which adversely affect profitability.
RoA
While the peer banks as group has been able to maintain RoA at the same level on a y-o-y basis, sequentially there has been a decline of 19 bps. Except, CBI which posted a loss of Rs 105.23 crore in the quarter ended March 2012, the RoA declined for all the other banks in the June quarter.
Notwithstanding the improvement in its RoA, CBI had the lowest RoA amongst the peer banks. Traditionally BoB which used to have the highest RoA amongst the peers witnessed a sharp decline of 40 bps and has been replaced by PNB as having the highest RoA amongst the peers at 1.08 per cent.
Cost-to-income ratio
Sequentially, the peer banks as a group improved their operating efficiency as measured by a decline of 170 bps in their cost-to-income ratio. BoB, Canara Bank, CBI and IDBI Bank reported improvement in their cost-to-income ratio.
On a y-o-y basis, this ratio, however, deteriorated by 4 bps. While this ratio improved for BoB, BoI and Canara Bank, it deteriorated for the rest four banks.
Growth prospects in 2012-13 also remain under cloud as the RBI has subsequently paused on interest rates in its subsequent two reviews in June and July in view of below normal monsoon, high inflation and fiscal profligacy.
The lowering of growth projections by the RBI from 7.3 per cent in its Annual Policy statement in mid-April to 6.5 per cent on August 1, 2012, is a reflection of the macroeconomic concerns. In this context, the going will be tough for the banks in the subsequent quarters and a test of their business acumen.
(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. The views are personal.)