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The banking sector has done well in the last quarter of the Indian financial quarter ending in March 2008 in areas such as modest rise in staff cost and strong net interest margins (NIM) as reported by private sector banks. The interest income of 18 public sector banks (PSBs) and seven private banks (PBs) grew by 28.4 per cent, while the net profit rose at a higher pace of 33.61 per cent.

The net interest income (NII) increased by 11.3 per cent, indicating the high cost of deposits and low spread. This is largely on account of an increase in the cash reserve ratio (CRR) and a moderate cut in prime lending rates by most PSBs.

The succor came from other income that rose by 20.5 per cent and lower provisioning by PSBs, up by five per cent.

The sequential net interest margins (NIMs) of most PSBs were under pressure after registering some improvement in the third quarter. The NII of 18 PSBs grew by 0.70 per cent, while NIMs declined by 7.55 percentage points to 30.57 per cent over the fourth quarter of the previous year. The 18 PSBs recorded 28.9 per cent rise in net profit, as a result of lower provisioning for non-performing assets and corporate tax.

The operating expenses of PSBs were almost flat on account of a decline in the wage costs (-13.2 per cent). The wage costs came down partly due to the write-back of excess provisions for employee liabilities following the revised AS-15 norms. The retiring employees also contributed to lower staff costs. The PSBs registered a strong net profit growth of 28.9 per cent despite a decline in NII of 10 PSBs and modest single digit growth for other banks. The low growth in operating expenses and reduced provisioning were among the major reasons for the high growth in net profit.

The wage costs were substantially higher for IDBI Bank and State Bank of Travancore, while they declined in the case of 10 banks, including SBI.


The PBs, however, saw an improvement in NIMs, with stable yields and marginally lower cost of funds. The NII of seven PBs rose by 47.3 per cent, while the NIMs increased by 2.56 percentage points to 35.41 per cent from 32.85 per cent in the previous year. With the result, net profit rose 47.9 per cent despite the higher provision for bad debts (increase by 22.5 per cent) and corporate tax (increase by 66.4 per cent).

Most private banks have done some provisioning for stressed cases. Axis Bank and Kotak Mahindra have disclosed the clients' losses, while ICICI and HDFC Bank have been silent on the matter.

The employee costs (+32.2 per cent) of PBs have remained on the higher side due to their rapidly expanding branch presence. ICICI Bank, however, has shown a modest 5.9 per cent rise in employee costs as it reversed the provisions for employee bonuses made in earlier quarters. The operating expenses of HDFC Bank have grown by 61.2 per cent largely on account of a 60.5 per cent rise in employee expenses following branch expansion.