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Economic upturn to help banks' and FIs' profits

An upturn in India's economic growth rate will feed banks' and financial institutions' bottomlines in the back end of 1999/2000 (April-March), but the full impact will be felt next year, analysts said on Friday. The results of a recent poll conducted by Reuters showed profits at State Bank of India, ICICI and Industrial Development Bank of India rising this year.

Analysts said higher credit offtake resulting from an improving economy will contribute to the improved profits.

Term lenders ICICI and IDBI were seen reporting a net profit growth of 23.7 percent and 17.55 percent respectively in 1999/2000 over the previous year.But the poll showed SBI, the country's largest commercial bank, which accounts for around one-fifth of deposits and advances nationwide, was expected to report a profit growth of 83 percent - but that largely reflected a reduced base after last year's fall in profits.

The poll showed SBI is likely to report a profit of 18.79 billion rupees in 1999/2000, up from 10.78 billion in 1998/99. "It has a high operating leverage so even a modest topline growth will translate into a significant improvement in the bottomline," said Manish, banking analyst at SSKI Securities.

SBI reported lower profits last year as earnings were hampered by higher provisions and wage increases and this lower base was the reason for the high growth expected in the current year's profits, dealers said. "The projected numbers are merely a pull back to the 1997/98 levels," Vimal Jain, banking analyst with Prime Broking Co India Ltd, said. SBI's profit in 1997/98 was 18.61 billion rupees.

Banks will see an increase in overall credit volumes before institutions like IDBI and ICICI, for whom infrastructure project finance lending is a key business, analysts said. "Demand for working capital funds, provided traditionally by banks will pick up in the initial phase of the recovery," said K.Ramachandran, head of research at Birla Sun Life Securities Ltd adding,"Project finance demand will follow with a lag," he said.

Though institutions have traditionally been lending term money, recently there has been a refocusing of their overall lending strategy which aimed at increasing their working capital penetration. "Short term lending will give institutions like ICICI nearly half of their fund based profits as the concept of universal banking gains ground," Prime's Jain said. ICICI was projected to make a net profit of 12.38 billion rupees up from last year's 10.01 billion.

Analysts projected IDBI earnings to top 14.8 billion rupees in 1999/2000 compared to 12.59 billion it reported in the previous year. "Though the interest spreads are lower, institutions will increase their exposure to short term debt because of lower incidence of non-performing assets," Jain said. Analysts said the competition for quality assets was lowering interest spreads at financial institutions but volumes and not spreads will be the future profit drivers, analysts said. "Short-term rates are constantly being driven down by institutions vying for top corporate loans so spreads are suffering," said Manish.

Analysts said top corporates were issuing instruments with coupons lower than banks' prime lending rates and this was also preventing credit offtake from improving.

(Reuters)

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