Global Outlook

Indian banks focus on other income segments will continue with a special emphasis on fee income pie

Contributed by Nirmal Bang

By Nirmal Bang

In the recent quarterly review of the monetary policy, the Reserve Bank of India (RBI) lowered the credit growth target for the banking sector for the current year to 16% from 18% targeted in October ’09. The deposit growth rate was also reduced to 17% from 18%.

According to India’s central bank, the increased availability of funds to banks from domestic non-banking sources like capital markets, commercial papers and external sources like depository receipts and direct investments, have resulted in lower credit growth for the banking sector. The tepid corporate sector credit also saw numbers moving downwards.

Preliminary calculations carried out by the RBI indicate that the total flow of funds from banks, domestic non-banking and external sources to the commercial sector during 2009-10 (up to 15th Jan ’10) was Rs 5,89,000 crore, marginally lower than Rs 5,95,000 crore in the corresponding period of the previous year.

Thus, the Indian banking sector that had optimistically started off the fiscal year thinking they would be able to achieve a credit growth target of 20% by the end of the year, are all projecting that they will finish the year with a growth of 15% to 16% each and this includes the big boys of banking such as State Bank of India and the likes.

After the Lehman Brothers collapse that snowballed into a full-fledged financial crisis gripping the global markets, there was an unusual shortage in the liquidity situation, the heat of which had to be faced by banks.

The non-food bank credit growth rate fell steeply from its peak of 29% registered in October ’08 to a tad over 10% in October ’09, registering a 10-year low.

The impact of the slowdown in economic activity had its effect on the demand for funds. Even in the current fiscal year, when the recovery that slowly started taking pace, there was a sharp downturn in credit growth not only because corporates had put all their capital expansion plans on hold but also because of the high base effect of 2007-08.

Now as the base effect begins to wear off and there is improvement in lending, banks are likely to achieve around 15% credit growth by March ’10 think bankers and banking analysts alike.

In fact, the situation has already started improving and the credit growth by mid-January ’10 has risen to the level of 14%. The reversal in credit growth started in November ’09, rising from 10.3% in November ’09 to 14.4% as on 15th Jan ’10.

Canara Bank Chairman AC Mahajan says, “The credit growth of the current fiscal has to be viewed against the high base of last year as well as lower demand that banks had to face in the current year, as an impact of the financial crisis.” Mahajan, however, sees credit offtake improving in the current quarter as corporate lending has shown improvement over the past month or so.

In fact, the recently announced quarterly numbers by banks also bear witness to the fact that they have been able to beat the blues of the slow loan growth by enhancing fee-based income and better margins.

Net interest margins improved quarter-on-quarter across all banks as there was a significant decline in the cost of deposits and the credit deposit ratio also improved (as loan growth picked up and proportion of bulk deposits continue to decline).

For large banks - except ICICI Bank which continues to consolidate its balance sheet - loans increased above industry growth at 11% year-on-year. The December ’09 quarter saw both HDFC Bank and Axis Bank reporting credit growth ahead of the system.

Sequentially, core operating profits improved across all banks as contribution from net interest income (NII) increased and trading profits declined.

The banks have also, during the quarter, increased their portfolio of low-cost CASA (current and savings account) deposits, which have helped them to maintain a healthy spread though their lending rates have fallen.

According to banking experts who participated in the recently held BANCON summit hosted in Mumbai by State Bank of India with organizational support from Indian Banks’ Association, the low credit offtake has forced banks to explore new ways to grow their business as credit growth slowed down significantly. This included relying more on fee-based operations like wholesale banking.

A rise in fee-based income, in fact, saved the day for many a lender in both the public and private sector, as was witnessed in the December quarter.

Boosted by a robust 48% rise in fee-based income, staterun IDBI Bank's net profit jumped by 29% at Rs 287 crore in the third quarter ended 31st December.

A healthy growth in its core fee-income also gave a boost to the profit of Bank of Baroda that beat expectations in the third quarter as it posted a 17.5% jump in its net profit in Q3 FY10, despite challenging market conditions.

The bank was able to post good numbers as its core fee income that comprises of commissions, bank guarantees and various charges, rose to Rs 356 crore in Q3 from Rs 280 crore a year ago.

Oriental Bank of Commerce, another public sector lender, witnessed nearly a 15% rise in its net profit as fee-based income rose to Rs 144.67 crore during the third quarter of the current financial year from Rs 100 crore, a year ago.

Other beneficiaries of an augmented fee-based income were banks such as Axis Bank that saw its fee income rise 29% to Rs 800 crore and HDFC Bank, which saw its fee-based income grow by 12.4% to Rs 723.7 crore.

Kotak Mahindra Bank was another private sector lender that saw a spurt in its net profit numbers thanks to a 34% increase in its other income from commissions, fees, exchange and brokerage to Rs 317.56 crore.

According to banking experts, while credit growth is expected to look up from the current quarter onwards, banks will continue to focus on their other income segment, with a special emphasis on the fee income pie. Thus in the coming months, one can expect a push in the fee-based activities from banks, said a chief financial officer of a large public sector bank.

This is also in the event when treasury income is curtailed as was witnessed in the December quarter. However, as the economy is well on its way back to growth and regulators are walking the talk of “managing the recovery” the banking sector will be a direct beneficiary, think market experts.

Thus, the much talked about credit growth that has so far been ailing over the last couple of years may well be round the bend.