Big banks - far bigger returns

Banks, especially the bigger ones are having the time of their lives. CY14 thus far has been all cheers for the banking sector, primarily driven by the governments ongoing appetite for heavy borrowing at hefty rates. While the focus remains on the PIB fiesta, on which banks have feasted merrily, the period has also seen decent uptick in advances as well.
The credit off-take during 9MCY14 has been healthier than any of the previous five years, but it went unnoticed largely due to the shift in asset portfolio from advances to investments. The consolidated top line of top five banks grew handsomely, as investments were swiftly shifted from treasury bills to longer-term term papers, offering lucrative returns - as high as 14 percent - close to what the most corporate of debts yield today.
The deposit growth remained at the lower side, but banks never tried to focus on adding more deposits. The focus was instead on improving the deposit-mix. The CASA ratio, as a result has improved significantly, bringing down the cost of deposits, which is a must in times of thin spreads.
Another feather in the cap was a remarkable turnaround of events relating to provision of NPLs. Banks have not lent aggressively and have rather focused more on lending carefully and cleaning the books. Prudent lending and aggressive provisioning in yesteryears combined to bring down the provision expense significantly, which lent an able hand to overall combined profitability. The NPLs have gradually come down and the coverage has significantly improved - all pointing towards healthier profits going forward.
Thin spreads and a likely decline in interest rates further augment the banks need to stress more on non-core income. Almost all the banks have reported healthy growth in other income, through cross-selling and treasury operations. In times of low spreads, this will keep the profits coming.
The ADRs have not changed drastically over the last year and little suggests they would alter anytime soon. Should rates come down, banks would be more than happy to book capital gains on their heavy PIB investments. The books are relatively cleaner as well, so a kick in advances cannot be ruled out.

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Big Five banks (Consolidated P&L)

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Rs (mn)                                9MCY14        9MCY13       chg

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Markup earned                         352,499       308,710       14%

Markup expensed                       186,942       166,058       13%

Net Markup Income                     165,556       142,652       16%

Provisioning/(Reversal)                 4,495        13,391      -66%

Net Markup Income after provisions    161,061       129,374       24%

Non Mark-up/Interest Income            75,154        62,236       21%

Operating revenues                    236,215       191,610       23%

Non Mark-up/Interest Expenses         115,900       101,784       14%

PBT                                   121,655        91,400       33%

Taxation                               40,959        28,577       43%

PAT                                    80,973        62,823       29%

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