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Treasury, fee income depress banks’ profit

A fall in treasury income and slower than expected growth in fee income, which together constitute non-interest income, have dragged down the profitability of banks in the first quarter.

Banks had booked profit on their government bond portfolio during the April-June period of last year. However, bond yields have hardened since July last year, following a tight monetary policy which resulted in lower profit from sale of investments. Fee income’s growth was muted, mainly due to sluggish loan demand that provided fewer opportunities for lenders to earn commission from activities like loan syndication.

Lower earnings from fees and commission, dividends from subsidiaries, trading profit and foreign exchange have impacted banks across the board, except for a few.

In the private sector banking space, apart from ICICI Bank and IndusInd Bank, all the large and mid-sized ones have recorded a fall in non-interest income in the quarter ended June of this financial year, as compared to the corresponding period of last year.

For instance, HDFC Bank’s non-interest revenue for the quarter was Rs 1,851 crore, compared with Rs 1,926 crore a year before. A decline of about Rs 90 crore in foreign exchange and derivatives revenue at Rs 224 crore and sale of investments (a fall of Rs 174.5 crore) at Rs 25 crore more than offset the rise in income from fees, commissions and miscellaneous income.

Similarly, for Axis Bank, the other income that includes fee, trading profit and miscellaneous income for the first quarter was Rs 1,691 crore against Rs 1,781 crore during the corresponding period of last year. Fee income in the corporate banking business was down 12 per cent over a year.

“The fall in the other income is a reflection of the slowdown in the corporate income. Even the fee income was muted as a result of this. The pressure is likely to continue for the next couple of quarters,” said Somnath Sengupta, executive director, Axis Bank.

Among large banks, State Bank of India is yet to announce its earnings.

Analysts said an improvement in the fee income growth could only be expected towards the end of this financial year. “Fee income growth has been very slugging for banks across the board. Several private sector banks that are major lenders to corporates have seen a slowdown in their non-interest income as a result of this. We can see improvement either towards the last quarter of this financial year or in the next year,” said Rajiv Mehta, analyst at IIFL.

YES Bank, a mid-sized lender, also reported a fall in non-interest income as compared to last year. During the June quarter, its non-interest income was Rs 426 crore, compared with Rs 442 crore in the corresponding period of last year. The management said the fall in the treasury income had limited the growth in net profit for the quarter.

“The gains (last time) were Rs 100-125 crore, due to interest rates falling. That opportunity did not present itself in the current quarter,” said Rajat Monga, group president, financial markets, and chief financial officer, YES Bank. “Adjusted for this higher base, we should have reported an 18-19 per cent growth in net profit.”

Even public sector banks have reported a fall in non interest income. With a comparatively small exposure to the corporate fee, it is mainly the losses in the treasury segment of the bond portfolio of the banks that has pulled down growth for these lenders, agreed experts.

For Union Bank, non-interest income for April-June was Rs 691 crore as compared to Rs 756 crore in the corresponding period last year. Bank of Baroda (BoB) reported a 16.7 per cent fall in other income, down to Rs 1,025 crore as compared to Rs 1,230 crore in the corresponding period last year.

S S Mundra, who was chairman of BoB when it had announced its quarterly earnings, had said this fall was due to a dip in the trading gains because of a hardening in the yields of government securities.

Ananda Bhoumik, senior director (banking), India Ratings, added: “Trading opportunities were less on the bond front. Even though banks could book profits on the equity side, opportunities were not there on the debt side in the June quarter. But this could surprise on the upside in the next couple of quarters.”

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