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A Contrasting Performance

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India's biggest private sector lender ICICI Bank posted its highest ever quarterly profit, while state-owned Punjab National Bank disappointed investors with lower profits, sending its shares down more than 7 per cent.

ICICI Bank's strong results helped justify investor faith in the stock. ICICI shares have risen nearly 60 per cent this year, outpacing 45 per cent growth in overall bank stocks and the broader Indian market's 23.4 per cent gain. The September numbers showed a continuation of the robust profitability exhibited by the bank for some time now. Net profits grew a forecast beating 30 per cent from a year ago to Rs 1,956 crore, bettering street expectations. This, in turn, was driven by a 35.7 per cent rise in operating profit, again a best for at least eight quarters.

A sharp rise in non-performing assets (NPAs) consisting of sticky loans and do not yield returns, on the other hand pulled down the net profit of Punjab National Bank by 11.6 per cent to Rs 1,065.58 crore in the second quarter ending September 30. The country's second largest public sector bank had posted a net profit of 1,205.03 crore in the year-ago period. Bad loans as a percentage of total assets rising to 2.69 per cent, from 0.84 per cent a year ago.
On a sequential basis as well, the bank's net profit in the July-September period was lower than Rs 1,245.67 crore recorded in the first quarter of this fiscal ending June 30, according to a BSE filing by PNB.
The results highlight the contrasting performance of state and private sector lenders in India. During tough spells in the economy, loans made by state-run banks, which account for 70 per cent of the market but whose lending decisions are not always driven by purely commercial factors, are more likely to fall into default.

Many government-owned lenders are exposed to the beleaguered state electricity boards, troubled power and infrastructure projects, and debt-laden firms such as Kingfisher Airlines, Air India and Deccan Chronicle.

Is The Worst Over?
"It is difficult to say whether the worst is over," said K. R. Kamath, Chairman of Punjab National Bank (PNB), India's second largest government-owned lender by assets.

"It is a reflection of what is happening in the economy. It all depends how the economy behaves in the next 3-6 months," he said.

ICICI Bank Managing Director and Chief Executive Chanda Kochhar attributed the robust numbers to the strong dividend income from its subsidiaries like insurance and broking, among others, apart from good retail-driven advances which pushed up the net interest income, which is the difference between interest paid and earned.

Bad loans at Indian Overseas Bank, a smaller state-run lender, rose to 2.25 per cent from 1.21 per cent a year ago, it said on 26 October, sending its shares down over 8 per cent.

Shares in State Bank of India fall 1.2 per cent on concerns of a potential increase in bad loans in the July-September quarter, after Punjab National Bank and Indian Overseas Bank posted a surge in non-performing assets. PNB shares fall 6.1 per cent after reporting a rise in net NPAs in the July-September quarter to 2.69 per cent.

India is battling high inflation, a yawning fiscal deficit and flagging growth amid political paralysis. Ratings agency Standard & Poor's has said the country faces a one-in-three chance of a downgrade over the next 24 months.

Consumer Lending
Infrastructure and power projects mired in land acquisition hurdles and corruption scandals have already started to pinch banks, which are either restructuring loans to these projects or classifying them as bad. Most private sector banks have stayed away from project financing.

"In general, private sector banks have a larger proportion of retail assets. Retail assets, in terms of quality, have been stable and their performance has been good," ICICI chief executive Chanda Kochhar told reporters in a post-earnings call.

The ratio of bad loans at ICICI dropped to 0.78 per cent in the September quarter compared with 0.93 per cent a year ago.

ICICI aims to grow its domestic loan book by around a fifth in the fiscal year ending March 2013, led by consumer loans and working capital, and will be particularly cautious in unsecured retail lending and project finance. Its net interest income - the difference between interest earned and interest paid out - rose 35 per cent to Rs 3371 crore.

Smaller private lenders HDFC Bank Ltd, Axis Bank Ltd and Yes Bank Ltd all recently reported strong quarterly profit growth.

State banks including PNB and Indian Overseas Bank have lagged the broader market and their private peers. They have risen nearly 3 and 9 per cent respectively this year.