Banking Sector Performance Report

Snapshot of the Banking sector Performance in Q2 FY10

Banking sector profit for the second quarter ended September 30, 2009 reported a moderate 20.0 percent growth as against 60.9 percent YoY growth during the quarter ended June 30, 2009. The growth in profits was mainly driven by a surge in other income which grew by 41.0 percent during the quarter under review. However, rise in provisions and lower credit off-take which led to subsequent fall in margins has restricted the growth in profits during the current quarter. Credit growth for the entire banking gamut stood at around 13.0 percent leading to a fall in the Net Interest Income (NII) which registered an increase of only 8.0 percent, which grew by 13.14 percent YoY in the previous quarter.

PSU banks have relatively performed better then Private sector banks in terms of gaining market share and reporting strong bottom-line numbers. The net profit growth of PSU banks for the quarter was 20.7 percent YoY as against 17.0 percent for Pvt. sector banks. Asset quality deteriorated sequentially with gross NPA moving from 2.29 per cent of gross advances to 2.35 per cent, 19 out of 39 banks have seen their asset quality deteriorate sequentially. They had more impact on the overall asset quality of the banks compared with
the 20 banks that have improved their gross NPA ratio. During the current quarter total provisions & contingencies rose by around 30.0 percent contributed mainly by NPA provisions.

Among the consortium, banks such as, Allahabad Bank, Central Bank of India, Lakshmi Vilas Bank, Kotak Mahindra Bank and IndusInd Bank registered a significant rise in their profits with Allahabad Bank registering a growth of 700.0 percent. On the other hand, Bank of India, Indian Overseas Bank, Federal Bank, Karnataka Bank and Syndicate Bank have seen their profits decline on YoY basis with Development Credit Bank registering a loss
during the quarter.

Result discussion

We recommended ten banking stocks based on basic valuations, five from Public sector banks and five from Private sector banks in our report dated 17 August, 2009.

The Q2 FY10 result discussions for all the ten stocks are given below –

Public Sector Banks

Punjab National Bank

PNB reported a 31.1 percent growth in net profit at INR 927 crore in the second quarter ended September. The growth in profit is fuelled by higher interest and treasury income. Net interest margins stood at 3.64 percent, down from 3.78 percent a year ago. Deposits grew by 23.9 percent YoY from INR 186315 crore for Q2 FY09 to INR 230823 crore in the current quarter. On the other hand credit grew by 25.4 percent YoY from INR 130432 crore for Q2 FY09 to INR 154703 crore as on September 09. Gross NPA to Gross  Advances ratio further declined to 1.58 percent as at September 09 from 2.18 percent as at September 08 and 1.60 percent as at March 09. Whereas Net NPA to Net Advances ratio declined to 0.14 percent as at September 09 from 0.42 percent as at September 08 and 0.17 percent as at March 09. By the end of the September quarter, PNB had restructured 5.8 percent of its total
loan portfolio compared with 5.2 percent at the end of June quarter. The provision coverage ratio of the bank stood at 91.1 percent in the quarter under review and was one of the best in the industry. Capital Adequacy Ratio (Base II) increased from 13.64 percent as on September 08 to 14.74 percent as on September 09.

IOB

Indian Overseas Bank has posted a net profit of INR 176.04 crore for the second quarter ended September 30, 2009, as against INR 359.02 crore it posted for the same period last year, thereby registering a decline of 51.0 percent. The main reason for the decline in the profits was due to liabilities incurred by acquiring Shree Suvarna Sahakari Bank and higher tax provision. Although other income surged by 72.0 percent to INR 372.39 crore, the zoom
in the cost to income ratio by 540 bps to 52.1 percent has resulted in  marginal growth of Operating Profits by 4.0 percent to INR 554.61 crore. GNPA as a percent of total advances moved up from 2.47 percent in Q2FY09 and 3.04 percent in Q1FY10 to 3.42 percent in quarter under review. On the other hand, NNPA has remained flat on QoQ basis and was up from 1.44 percent in Q2FY09 to 1.59 percent in the quarter under review. The provision
coverage ratio of the bank stood at 59.0 percent in the quarter ended  September 09 as against 42.0 percent in the corresponding previous year. The total business grew from INR 160514 crore to INR 187853 crore, posting a 17.03 percent YoY growth. While the total deposits grew 20.54 percent to INR 109435 crore, the total gross advances were up 12.46 percent at INR 78418 crore as against INR 69727 crore in the corresponding period last year. The capital Adequacy ratio as per Basel II norms was 14.65 percent in the quarter under review as against 11.85 percent in the corresponding previous quarter.

Indian Bank

Indian Bank, for the quarter ended September 09, has reported 31.0 percent increase in the Net Profit to INR 371.98 crore on the back of 11.0 percent increase in NII to INR 759.12 crore. Subdued credit growth in the quarter under review, coupled with dip in Yield on advances from 11.51 percent in Q2FY09 to 10.83 percent in Q2FY10; has resulted in a few
9.0 percent rise in the Interest from Advances to INR 1412.29 crore. NIM of the bank has also slipped from 3.86 percent in Q2FY09 and 3.56 percent in Q1FY10 to 3.45 percent in quarter ended September 09. The Cost to Income ratio of the bank has declined by 110 bps to 44.4 percent and thus lifted up Operating profits by 14.0 percent to INR 553.86 crore. Further, dip in Provisions including taxation by 11.0 percent to INR 181.87 crore, has
pushed Net Profit up by 31.0 percent to INR 371.98 crore. GNPA to Gross Advances has more or less remained flat, both on YoY basis and sequential basis at 0.89 percent. On the other hand, the percentage of NNPA to Net Advances was flat at 0.18 percent on YoY basis but has declined from 0.40 percent in Q1FY09. The Overall Business of the Bank grew by 19.0 percent to INR 133987 crore for the quarter ended September 09 as against INR 112706
crore, in the corresponding previous year. Total Deposits rose by 24.0 percent to INR 80068 crore in quarter under review from INR 64614 crore in the corresponding previous quarter. Gross Advances increased just by 12 percent to INR 53919 crore in Q2FY10 from INR 48092 crore in Q2FY09.

Bank of India

Bank of India reported a decline of 57.0 percent in net profit to INR 323.34 crore for the current quarter, over the same period a year earlier. However, the bank's total income grew by 12.0 per cent to INR 5164.96 crore from INR 4612.27 crore of the year ago quarter. Thebank's core non-interest income  slumped 23.5 percent on YoY basis to INR 339 crore. Treasury profit rose seven-fold to INR 151 crore in September 09 against 18.0 percent in the
corresponding period. This along with interest income from investment rose by 33.0 percent to INR 1077 crore contributed to the profit earned. Net interest income largely remained flat at INR 1409 crore against INR 1363 crore a year ago. Added to this, on a YoY basis, bank's deposits rose 21.0 percent to INR 198715 crore while advances increased 16.0 percent to INR 150238 crore. The bank's Gross NPA jumped 98.15 percent to INR 3919.72 crore in Q2 September 2009 over Q2 September 2008. The ratio of gross NPA increased to 2.61 percent as on September 2009 from 1.53 percent as on September 2008. The net NPA as of September 30 2009 was at 1.08 percent, higher than 0.48 percent as of September 30 2008.

Andhra Bank

Andhra bank for the quarter ended September 09 has reported 70.0 percent increase in the Net Profit to INR 273.97 crore on the back of 19.0 percent increase in the NII to INR 514.66 crore. NIM of the bank stood high at 3.14 percent against 2.85 percent in Q1FY10 while cost of deposits stood at 6.35 percent as against 6.79 percent in Q1FY10 in the quarter under review. The sharp increase in other incomer by 84.0 percent to INR 233.19 crore coupled
with sharp dip in the cost to income ratio of the bank to 39.5 percent from 50.3 percent in the corresponding previous quarter has pushed up operating profit by 63.0 percent to INR 452.81 crore. Further marginal 2.0 percent rise in the provisions and contingencies to INR 57.83 crore has facilitated Net profit to grow by 70.0 percent in the quarter ended September 09. Gross Advances grew by 32.0 percent to INR 48182 crore while total deposits moved up by 23.0 percent to INR 62279 crore. The percent of Gross NPA to Gross advances for the quarter was at 0.83 percent as against 1.03 percent a year ago and 0.8 percent a quarter ago. Added to this, percentage of Net NPA to Net Advances stood at 0.16 percent in the quarter as against 0.24 percent and 0.22 percent a year and quarter ago respectively. The provision coverage ratio of the bank has increased to 83.66 percent in the quarter under review.

Private Sector banks

Federal Bank

Federal bank has reported pale numbers in the quarter ended September 09 with Net Profit down by 12.0 percent to INR 101.07 crore on the back of 1.0 percent fall in Net Interest Income to INR 329.95 crore. The NIM of the bank has fallen steeply from 4.10 percent in the quarter ended September 08 to 3.51 percent in the quarter under review. Although other income facilitated Net Total Income to rise up by 7.0 percent to INR 466.38 crore, spike in the cost to income ratio by 450 bps to 35.0 percent and zoom in the effective tax
rate has pulled down the Net Profit. Total business of the Bank reached INR 59218 crore, showing an increase of 24.0 percent from the corresponding period of the previous fiscal. Total deposits increased by 27.0 percent from INR 26430 crore as on September 08 to INR 33439 crore in the quarter under review. Net Advances went up by 21.0 percent to INR 25779 crore as on 30 September 2009 from INR 21326 crore as on 30 September 2008. This
growth was contributed by retail, SME and corporate advances. GNPA for the quarter stood at 2.99 percent as against 2.62 percent in Q2FY09 and 2.65 percent in Q1FY10. Similarly NNPA of the bank stood at 0.54 percent from 0.4 percent in Q2FY09 and 0.29 percent in Q1FY10. The Provision coverage ratio of the bank stood at 81.73 percent in the quarter under review. The Capital Adequacy of the Bank, computed as per Basle I guidelines, stood
at 17.91 percent as on September 2009, against the regulatory minimum of 9.0 percent.

Yes Bank

Yes Bank has reported robust growth of 76.0 percent in the Net Profit to INR 111.71 crore in the quarter ended September 09, on the back of 30.0 percent increase in Net Interest Income to INR 159.95 crore. The loan book of the bank has increased by 42.0 percent in the quarter under review. The bank has maintained a flat NIM on sequential basis at 3.1 percent. The growth in non interest income coupled with the fall in cost to income ratio has aided strong growth in Operating profits by 96.0 percent to INR 191.81 crore. The growth in
Net Profit would have been much higher but, huge provisioning at INR 23.37 crore as against INR 0.70 crore in corresponding previous year, has restricted it. The Advances of the bank has improved by 42.0 percent to INR 16294 crore while the deposits grew by 35.0 percent to INR 19365 crore in the quarter under review. The Capital Adequacy of the bank for the quarter ended September 09 was 17.3 percent with Tier I capital of 9.4 percent as against 17.63 percent in the quarter ended June 09.

Karur Vysya Bank

Karur Vysya Bank has posted a Net Profit of INR 90.90 crore for the second quarter ended 30 September 2009, up by 46.07 percent compared to INR 62.23 crore in the same period last year. The total interest income for the second quarter was up 23.61 percent at INR 433.97 crore as against INR 351.07 crore in the corresponding period last year. The bank’s net interest income was up on the back of better than expected yield on investments. The
net interest margin currently stood at 3.06 percent. The bank’s total business was up 23.91 percent at INR 28527 crore as against INR 23022 crore in the corresponding period last year. While the total deposits grew by 24.41 percent to INR 16529.29 crore, the total advances were up 23.22 percent at INR 11997.60 crore. The net NPA as a percentage of net advances
has come down from 0.52 percent in Q2FY09 to 0.22 percent in Q2FY10.

Axis Bank

Axis Bank has registered 26.0 percent increase in the Net Interest Income to INR 1149.68 crore owing to improvement in NIM to 3.52 percent as against 3.34 percent in Q1FY10 and 3.51 percent in Q2FY09. The main reason for the spike in margin is decline in the cost of funds to 5.41 percent in the quarter under review as against 6.09 percent in Q1FY10 and 6.23 percent in Q2FY09. The other income surged by 53.0 percent to INR 1065.58 crore on the back of more than six fold rise in the trading Income and spike in the other miscellaneous income. However, provisions and contingencies too have zoomed by 95.0 percent to INR 498.89 crore and limited growth in Net Profit to 32.0 percent at INR 531.64 crore. Treasury operations and retail Banking has posted fabulous performance for the quarter under review. The Gross NPA as percent of gross Advances was at 1.21 percent in the quarter ended September 09 as against 0.91 percent in Q2FY09 and 1.01percent in Q1FY10. On the other hand, Net NPA as percentage of Net Advances have marginally rose to 0.45 percent from 0.43 percent in Q2FY09 and 0.41 percent in Q1FY10. The Bank is well capitalized with a Capital Adequacy Ratio of 16.47 percent as at the end of Q2FY10 compared to 12.20 percent as at the end of Q2FY09 and 15.28 percent as at the end of Q1FY10.

J & K Bank

Jammu and Kashmir Bank posted a Net Profit of INR 134.27 crores for the
quarter ended September, up 16.0 percent compared to INR 115.92 crores earned during the corresponding quarter of previous financial year. The bank’s other income improved considerably during the quarter from INR 41.05 crore to INR 101.19 crore. Trading income rose to INR 119.03 crore from INR 22.34 crore, the main components of which are INR 43.32 crore earned on revaluation of investments and INR 10.00 crore on debt securities. Net Interest Margins Ratio for the quarter stood at 3.0 percent as against 3.41 percent for the corresponding quarter of previous financial year. Gross and Net NPA Ratios as at quarter ended September 2009 came down to 2.23 percent and 0.55 percent respectively compared to 2.29 percent and 0.96 percent as at quarter ended September 2008. The bank has impressively improved the NPA coverage ratio from 58.4 percent to 75.6 percent.

Outlook

The overall outlook on the sector in the medium term is positive with most banks likely to improve credit growth and business earnings in the coming quarters as the economy appears poised for a recovery. Although currently credit off-take is sluggish, it is expected to be higher in the second half of the current financial year as compared to the first half, as there are many projects in the pipeline waiting to be executed for which many banks have sanctioned huge loans. However, many large banks have pruned their credit targets for the year, after the RBI pruned its projection for credit growth to 18.0 percent in its quarterly review of monetary policy last week from 20.0 percent earlier. Added to this, tighter provisioning norms announced by the Reserve Bank of India in its policy review could have a significant impact on banks' profits over the short term The Central Bank has asked banks to ensure that their total provisioning coverage ratio is not less than 70.0 percent and imposed a timeframe of September 10 to achieve this target. Banks with a low provision
cover ratio combined with low core Tier 1 capital could face a downward rating pressure. The RBI has also increased the provisioning requirement for advances to the commercial real estate sector classified as standard assets from the present level of 0.40 percent to 1.0 percent, a move that makes lending to the sector tougher. On the margin front, with the deposit rates hovering at 6.0-6.5 percent, operating margins of banks is likely to improve
over the next few quarters.

Taking into consideration various valuation and fundamental parameters, coupled with Q2 FY10 performance, our top picks in the banking space are –
Public Sector Banks Private Sector Banks
1) Indian Bank 

2) Punjab National Bank

3) Andhra Bank

4) Bank of India

5) Canara Bank

6) Federal Bank

7) Yes Bank

8) South Indian Bank

9) Axis Bank

10) Karur Vysya Bank

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