PSO Operating Profits Increase Commission Revenue in Q2FY23

A handful of public sector banks (PSB) posted higher operating profits in the second quarter of the current fiscal year, as cash losses were more than offset by commission income. Major PSB had recorded an operational loss in the previous quarter due to a loss on investments.

The State Bank of India (SBI) reported a 17% rise in operating profit before provisioning (PPOP) while the Bank of Baroda (BoB) recorded a moderate rise of 6%. Other banks such as Union Bank of India, Punjab National Bank (PNB), Canara Bank and Bank of India saw their operating profits increase in the range of 8-39%. GNP saw the biggest jump at 39% in its PPPO.

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The raise of SBIOperating profit was led by a 10% year-on-year increase in fee income to Rs 5,942 crore and foreign exchange income. The lender saw a moderate increase in cash income at 7% to Rs 457 crore in Q2FY23. On a sequential basis, the bank had reported a loss of Rs 6,549 crore. SBI’s fee-based revenue increased due to higher loan processing fees, cross-selling and government business commissions.

The bank had the opportunity to post a value-to-value gain in the second quarter, SBI Chairman Dinesh Khara said on a call with analysts, adding that the lender had consciously decided to not saving it, keeping it as a reserve for a rainy day.

However, a cash loss of Rs 435 crore dragged down BoB’s non-interest income despite a 12% year-on-year increase in fee income. Its cash loss narrowed on a sequential basis from 588 crore. Lower recovery of technical write-offs also impacted its non-interest income.

Lenders also saw a significant improvement in their net profits, with SBI posting the highest quarterly profit of over Rs 13,265 crore. BoB also recorded a smart 59% year-over-year increase in its profit for Q2FY23. Two exceptions to this were BoI and GNP, which saw their provisions increase, resulting in a decline in net income of 9% and 63%, respectively. The increase in provisions is explained by the increase in provisions for bad debts.

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Union Finance Minister Nirmala Sitharaman said on Monday that the 12 PSBs reported a 50% increase in their combined net profit to Rs 25,685 crore in the second quarter. Shares of SBI and BoB hit all-time highs after their results on Monday.

Since nearly all PSOs are doing well on all metrics, there are questions about the sustainability of this growth. According to SBI’s current loan portfolio, if there is a downturn, it will be primarily due to slower overall growth rather than an asset quality or cost of credit issue, Kotak Institutional Equities said in a report. On the profitability front, SBI posted a moderate 5 basis point expansion in its net interest margin (NIM) relative to its peers. However, lender margins are expected to hold at these levels as the repo rate hikes are implemented, brokerage Macquire Research said in a report. The bank also indicated that full transmission of lending rates will take place in the second half of FY23. ‘slower fee income growth or a slightly higher cost structure,’ Kotak Institutional Equities said. The same cannot be said in the case of BoB, according to Macquire, as NIMs will decline as filing costs begin to catch up. To be fair, the BoB had beaten its NIM estimate by 20 basis points in Q2FY23.

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