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According to a JM Morgan Stanley report on Indian Financial Services, Indian banks are running high costs to assets ratio or cost to core income ratio & need to rationalise to improve return profile in retail business. Banks are required to put infrastructure in place in such areas as information technology, marketing and distribution to refocuss on retail business.
The study has found that the aggregate costs of eight banks — State Bank of India, ICICI Bank, Oriental Bank of Commerce, HDFC Bank, Corporation Bank, Punjab National Bank, Bank of Baroda and Canara Bank — rose 18 per cent year-on-year and 13 per cent sequentially in the second quarter of the fiscal 2003-04.
The rate of cost increase reflects more economic accounting for pensions and leave encashment, general inflationary pressure with wholesale price index inflation running at five per cent and the additional cost such as marketing and distribution of the retail efforts.
The average cost to income ratio is at 38 per cent. However, the average cost to core income ratio, which strips out the effect of capital gains on income as it is entirely market driven and a function of interest rate environment, is at 54 per cent. According to the report, this is not sustainable.
The report says banks’ treasury/bond portfolio will also be pressured. These bond portfolios are still earning significantly above-market yields, but given the increasingly liquid balance sheet and the substantial investments at much lower yields in fiscal 2003-04, overall yields will compress more over re-investment pressure will also eat into the excess return.
... Read study of Crisil on Bank profitability
...Read report of Icra on Bank profitability
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