Commercial banks' profit margin shrinks

The commercial banks have been facing rough weather.

The key indicators -- Profit margin, earning per share (EPS) and Return on Equity (RoE) -- to guage the performance of the listed commercial banks have slowded down.

"With the increasing number, the profit margin of the commercial banks witnesed a slowdown in the last fiscal year," according to a reserch on the sector-wise average by Securities Research Center and Services Pvt Ltd (SRCS).

In the year 2007-08, the average profit margin of the 23 listed commercial banks was 27.09 per cent but in 2007-08, it posted only 27.86 per cent.

"Cut-throat competition among the rising number of commercial banks and lack of market expansion have pulled their profit margin down," said market analyst Rabindra Bhattarai.

Currently there are 27 commercial banks in operation and some four are in pipeline making it hard to increase the profit margin.

The average profit margin was 18.32 per cent in 2004-05 when there were only 17 listed commercial banks.

Similarly, the earning per share (EPS) has also slowed down, as the market is flooded with rights and bonus shares. In 2007-08, an average EPS of the listed 23 commercial banks was Rs 35.36 but it increased to only Rs 36.74 in 2008-09. EPS is generally considered to be the single most important variable in determining a share's price.

One of the most important profitability metrics Return on Equity (RoE) has declined. The average RoE of the listed 23 commercial banks stood at 24.73 per cent in 2008-09 against the 2007-08's average of 25.22 per cent. RoE reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet.

Due to increasing rights and bonus shares Networth Per Share (NWPS) has also slowed down. In the year, 2006-07 an average NWPS -- a measurement of the net worth of the company for each share of stock that has been issued -- of 18 listed commercial banks was Rs 141.56 which went down in the fiscal year 2007-08 to Rs 140.21 as the listed commercial banks increased to 23. In 2008-09, it posted Rs 153.88.

However, the sector can heave a sigh of relief on non-performing assets (NPA), price-earning (P/E) ratio and return on assets (RoA) — the other key indicators. The average NPA was 1.98 per cent in 2008-09 against a year ago's 3.58 per cent. NPA -- an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions relating to asset classification issued by the central bank -- has to go down.

During the fiscal year 2007-08, the overspeculation of the investors in the secondary market have raised the shares of commercial banks' P/E ratio to an average of 65.60 times that came down to an average of 56.28 times in 2008-09.

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself.

The average RoA has, however, almost doubled in 2008-09 to 2.21 per cent from 1.76 per cent a year ago. RoA -- an indicator of how profitable a company is relative to its total assets -- gives an idea as to how efficient management is at using its assets to generate earnings.