Both public and private banks are facing a similar predicament today – the lying mirror! manish k. pandey discusses the dangers ahead, and how strong numbers during the past quarter were simply, just numbers...
There’s an old nursery rhyme – the wise man built his house upon a rock, while the foolish man built his house upon sand... and one house came tumbling down – which one? If Indian banks could answer even this ragamuffin of a question correctly, one suspects they wouldn’t have been blinded by the illusory numbers that are plumped by them as their quarterly results. Indian banks still haven’t realised the difference between reality and reverie. This commentary is a treatise on how Indian banks are living a most dangerous path by believing that the ‘good’ financial results of the last quarter were because of their strategies... they definitely were not!
No doubt, banks, both private and public sector, reported strong earnings growth ranging between 20-50% during the first quarter of FY2010. But when we analysed the earnings breakup, we saw that the meat of these earnings came mostly from one-off trading profits (which was nearly 30-60% of the total profit before tax) and not from their core net interest margins (NIMs). In truth, the NIMs were lower than even those expected. A CARE report mentions, “Higher cost of funds and lower lending rates brought down the NIMs of the top 12 banks (including State Bank of India, Bank of Baroda, Bank of India, Canara Bank, Axis Bank, HDFC Bank, ICICI Bank, IDBI Bank, Central Bank of India, Punjab National Bank, Union Bank of India and Syndicate Bank, which cover 61% of all credits in India) in the April-June quarter due to a subdued growth in the net interest income (NII).” It may sound surprising, but the truth is that the NII comprised less than 10% of the total income reported by a majority of banks. Raison d’être: The unprecedented surge in bank deposits coupled with a reluctance in issuing fresh loans (due to the threat of rising defaults playing in the bankers’ heads). This certainly has led to a problem of ‘plenty’ for many banks that have made a record by pooling large sums of monies with the Reserve Bank of India (RBI) under reverse repo.
There’s an old nursery rhyme – the wise man built his house upon a rock, while the foolish man built his house upon sand... and one house came tumbling down – which one? If Indian banks could answer even this ragamuffin of a question correctly, one suspects they wouldn’t have been blinded by the illusory numbers that are plumped by them as their quarterly results. Indian banks still haven’t realised the difference between reality and reverie. This commentary is a treatise on how Indian banks are living a most dangerous path by believing that the ‘good’ financial results of the last quarter were because of their strategies... they definitely were not!
No doubt, banks, both private and public sector, reported strong earnings growth ranging between 20-50% during the first quarter of FY2010. But when we analysed the earnings breakup, we saw that the meat of these earnings came mostly from one-off trading profits (which was nearly 30-60% of the total profit before tax) and not from their core net interest margins (NIMs). In truth, the NIMs were lower than even those expected. A CARE report mentions, “Higher cost of funds and lower lending rates brought down the NIMs of the top 12 banks (including State Bank of India, Bank of Baroda, Bank of India, Canara Bank, Axis Bank, HDFC Bank, ICICI Bank, IDBI Bank, Central Bank of India, Punjab National Bank, Union Bank of India and Syndicate Bank, which cover 61% of all credits in India) in the April-June quarter due to a subdued growth in the net interest income (NII).” It may sound surprising, but the truth is that the NII comprised less than 10% of the total income reported by a majority of banks. Raison d’être: The unprecedented surge in bank deposits coupled with a reluctance in issuing fresh loans (due to the threat of rising defaults playing in the bankers’ heads). This certainly has led to a problem of ‘plenty’ for many banks that have made a record by pooling large sums of monies with the Reserve Bank of India (RBI) under reverse repo.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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