Bank spreads, profitability come under pressure

This is ominous given the fact that spreads have declined across all bank groups and that the Centre has contributed till date Rs 20,446.12 crore in recapatalising banks. The combined spread of 27 state-run banks fell to 2.81 per cent in 1998-99 from 2.91 per cent in 1997-98. In the case of the StateBank of India and its 7 associates, it stood at 2.85 per cent, down from 3.14 per cent, there was a marginal improvement in the spread for other state-run banks to 2.79 per cent from 2.78 per cent. With respect to old private sector banks, spread stood at 2.16 per cent (2.57 per cent), new-generation banks at 1.98 per cent (2.23 per cent) while in the case of foreign banks, the same is at 3.47 per cent (3.93%).

Profits of commercial banks fell to Rs 13,992 crore in 1998/99 from Rs 14,640 crore in the previous year, the RBI said, adding that the decline in profitability was on account of increase in interest expended and the operating losses incurred by nine of the banks. Intermediation costs increased marginally to 2.65 per cent in 1998/99 from 2.63 per cent in the previous year, the report said.

Interestingly, the RBI’s report does not give spreads post-adjustment for interest earned on the re-cap bonds. Post-adjustment figures pertain only to net-profits and operating profits. In the case of operatingprofits, the cumulative post-adjustment figure is Rs 3,969.58 crore, down from the Rs 5,929.44 crore. This lack of adjustment for interest on re-cap bonds across other parameters gives a misleading picture of a state-run bank’s health.

The RBI, for the first time, included stock market behaviour of bank scrips in its annual review of the banking sector concluding that bank stocks needed a fillip in view of their need to raise capital from the primary market. “The secondary market has to provide more varying investors’ perception, liquidity and depth for the traded (bank) scrips,” RBI said.

The poor performance was reflected on the share prices of banks. During 1998-99, bank scrips listed on stock exchanges showed a significant decline in their prices, affecting market capitalisation and market turnover of the scrips. On March 31, 1999 shares of eight public sector banks and that of 17 private sector banks were listed on the NSE. The RBI has restricted its analysis to movements on the NSE. PSB scripswhich declined significantly were those of BoB (54.5%), State Bank of Travancore (54.4%), Bank of India (52.4%) and SBI (23.6%). Private sector bank stocks whose market performance was affected included Bank of Rajasthan, Federal Bank and HDFC Bank, the report said.

The battering the scrips got in the secondary market was attributed to their poor performance. Shares of some private banks such as IndusInd Bank Ltd, were traded at a marked discount to its issue price. The market cap of all bank scrips on the NSE was Rs 19,561 crore in 1998-99 as against Rs 28,332 crore in 1997-98.