High Profitability- A Game Changer for the Banking Sector

P For Profit

Profitability is one of the most important yardsticks for assessing the prospects of a company’s future growth. In today’s competitive business scenario an enterprise can sustain its operations over the long haul if its earnings from profits follow the required growth trajectory. Hence, profitability, along with growth, forms the bedrock of India’s Banking Sector.

Private Sector Banks have reported sluggish growth numbers of 2.6% in the June quarter this year, which was significantly lower than the 11.1% figures in the same period last year. However, Public Sector Banks were worst hit even as their average net profits dropped by a whopping 113.1%. The sharp fall in profits between FY2016-17 gave rise to higher NPA numbers on the Banks books. High burden of Non Performing Assets forced most of the banks to make room for higher provisioning, thereby curbing a chunk of the liquidity. Outgoing Governor Raghuram Rajan brought about significant changes by proposing that the regulatory differences between public and private banks should be eliminated for improved governance.

Vital Stats

The banking framework in India is stronger compared to the banks in Europe and the United States. The Banking Sector is also the major driver of economic activities in the country. Following is a profit-wise comparison of the top performing and under-performing banks in the public sector -

1. Statistics suggest that Indian Bank holds one of the most promising prospects in public sector. The bank’s share price has seen a sharp rise of 51% between August 2015 and ’16. Surprisingly the Banks share prices have shot up by 219% between March and August 2016. Indian Bank’s EPS numbers have fallen to 1.76 in the fourth quarter from impressive figures of 4.48 reported in the first quarter of 2016. However, the QoQ comparison reveals that the EPS numbers have jumped to 6.4. in the first quarter of FY 17.
2. Canara Bank has reported impressive EPS numbers of 4.22 in the first quarter of FY17. These figures show a remarkable recovery from the previous quarter, where EPS figures were negative 71.92. PAT numbers too have risen by 106% on the QoQ basis. Canara Bank’s share price has risen by 54.63% compared to its share price in the previous quarter.
3. State Bank of India, which is the largest public bank in the country, has recently merged with its associates. The Bank has reported an EPS of 3.25 in the June quarter. Although SBI’s PAT has increased 100% from the previous quarter along with a 50.82% rise in price hinting towards better times, its EPS and share price remained subdued in the last one year.
4. As per the reported profitability figures, State Bank of Mysore shows the worst profit figures. Its EPS in the first quarter of FY 2017 was (-98.28). Also, there has been a 533% fall in its PAT numbers compared to the previous quarter. Despite these figures, State Bank of Mysore’s share price has risen 66.23% in the June quarter. This positive change can be attributed to the Bank’s approval of the merger with the State Bank of India.
5. Similarly, on the account of the news of merger with SBI due to the meeting held on 18th August, 2016, State Bank of Bikaner and Jaipur’s share price has gone up by 66.23% in the past 6 months. However, its profit figures show a dismal scenario. The reported EPS of the June quarter stood at -31.65 while the PAT figure fell sharply from Rs.192.33 crores to a negative figure of Rs.221.56 crores.
6. The Bank of India reported EPS of (-8.32) in the first quarter of this financial year. Although its PAT is showing an 80% growth in the current quarter, this is attributed merely to a decline in losses. On the 19th of July, the Government of India pumped in Rs.1784 crores to recapitalize Bank of India. Hence, the 30% rise in its Bank of India share price hint towards artificial stimulations from external sources.

Other Important Factors

A very important factor that can help significantly improve the health and the business environment of India’s banking sector is to implement innovative measures to enhance the bank’s net interest margin. These measures backed with lower establishment costs can lead to a remarkable turn-around story for the banking sector in the days ahead. With the adoption of the GST, the effective tax rate on fee-based transactions is expected to rise to 18-20% in comparison to the current level of 14%. A direct consequence of an increase in taxes on input services would be seen in terms of a marginal increase in operating expenses comprising of rent, insurance, advertisement, legal and professional fees, etc. But this would have a neutral effect on the bank’s profitability because the increase in expenses would be passed on to the customers who will bear the cost.

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