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5 things to understand from banks’ Q2 results
Ask any expert what is their top worry about the Indian economy. The answer is most likely to be related to the banking system.
A stark rise in bad loans has worried almost everyone. It affects banks’ profits. Plus, it reflects poorly on the state of the economy. After all, people fail to pay back loans only if they have limited income—a sign of poor economic growth. Moreover, a strong banking system is vital for the economy to growth.
As a result, financial results of banks hold extra importance. So far, 18 banks, barring ICICI and SBI, have reported their financial results for the July-September 2016 quarter.
We read through the fine print and found some trends that could be useful to you as an investor.
Here are five important takeaways from the second quarter results of the Indian banks:
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The private v/s public divide:
Private banks continued to outperform their government-owned peers. Some of the best performers in terms of profit growth were private lenders, IDFC Bank, Kotak Mahindra Bank, and HDFC Bank. Many public-sector banks like State Bank of Travancore posted losses. Some other PSU banks like Canara Bank reported a fall in profits. The most worrying report came from Axis Bank, which announced sharp 83% decline in earnings compared to the same quarter last year.
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NIIs, the profit driver:
Experts often consider Net Interest Income a more important metric than net profit. It measures the difference between the interest a bank earns on its loans and the interest it pays on deposits. It thus shows whether a bank’s business is inherently profitable. The 18 banks reported a 9.78% growth in total interest earned, compared to the same quarter last year. A robust rise in NIIs drove profits higher for Indian banks in this quarter. This shows that the banking business is inherently profitable despite the rise in bad loans. Yes Bank, for instance, reported a 31.3% rise in profits despite higher provisions this quarter. This was because of a 30.5% growth in NIIs from the previous year. However, many public-sector banks reported a fall in NII. Canara Bank, for example, saw its NII fall by 7.7% on a year-on-year basis. This led to a 32.5% fall in net profits.
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Margins squeezed:
It helps when you compare profits with the revenue. This gives you an idea about how much percentage of revenue do you pocket as profits. The greater the percentage, the better the profitability of the business. For banks, this means comparing the Net Interest Income (NII) with the total assets. This gives you the Net Interest Margin. On the whole, the 18 lenders reported a narrower NIM of 2.57% in the quarter compared to 2.66% in the last year.
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Loan demand up:
This was another worry – the poor demand for loans. After all, without giving loans, banks cannot make any profits. However, many banks, especially the privately-owned ones, reported an improvement in loan demand. Lenders like IDFC Bank, Federal Bank, HDFC Bank and even the stressed Axis Bank reported double-digit growth of their loan books. This is a positive signal.
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Bad loans:
Banks are recognizing more and more loans are ‘Non-Performing Assets’. This is as per the revised rules set by the Reserve Bank of India. As a result, NPAs are on the rise. The 18 banks together have Gross NPAs worth Rs 1.44 lakh crore, 127% more than the figure reported last year. When you compare with the previous quarter ended June 2016, the rise is 15.6%. This is the quantum of loans that have not been paid back. To make up for these bad loans, banks set aside Rs 11,886 crore from their profits in the quarter. This is the key reason behind the poor profit growth.
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Rs 16.2 lakh crore
Interest payments are not the only source of income for banks. They also earn from other activities for which they charge a fee. The beleaguered public-sector banks, in fact, are likely to rely on such a source in this quarter, according to a report by Economic Times. Banks like State Bank of India have sold bonds at high prices, taking advantage of sharp falls in interest rates. This is likely to have boosted their profits even as bad loans take a toll. Banks sold bonds worth Rs 16.2 lakh crore.
