Private banks focus on cost control to improve earnings

Private banks focus on cost control to improve earnings

Last Updated: Fri, Jan 24, 2014 06:49 hrs
A cashier counts currency notes as customers wait inside a bank in Hyderabad

​Private sector lenders are keeping a tight leash on their staff cost and administrative expenses to improve earnings growth in the current uncertain macro-economic environment. The rise in operating expenses of most private banks has decelerated in October-December period compared to a year earlier as they shifted focus on improving the efficiency and utilisation rates.

HDFC Bank, the second largest private sector lender in the country, reported only 3.8% year-on-year rise in its operating expenses during the third quarter of 2013-14. It allowed the bank improve its cost-to-income ratio to 42.7% at the end of December, 2013 from 47.2% a year earlier.

"The revenue growth from interest and fee income helped our earnings. But profit was clearly boosted because of tight cost control. We were able to hold back expenses growth under 4%. We decided to tap into operating efficiency and focus on improving productivity. In this environment, it is natural to focus more on cost control," Paresh Sukthankar, deputy managing director of HDFC Bank, said.

The bank's headcount has reduced by around 1,500 employees in the last 12 months, which allowed it to cut staff cost from a year earlier. The private lender closed last quarter with a workforce of 68,200 employees.

Rival Axis Bank also managed to keep its staff cost under control despite its employee count increasing by more than 5,000 in the last one year. The country's third largest private sector bank's staff cost increased by 6.5% on a year-on-year basis in October-December quarter compared to 13.5% rise in the corresponding period of 2012-13.

"With slower growth in operating expenses, the bank's core operating profit and net profit have also shown healthy growth," Axis Bank said in its third quarter earnings statement.

The growth in operating expenses of IndusInd Bank has also slowed down to around 22% from over 30% in the last few quarters. "The large capex (capital expenditure) that we had to incur were incurred, for instance on technology...As far as operating expense goes, the branch break-evens are now reaching a stage that the ratio of the new branches to total branches is falling. When that happens, certainly operating expense takes a downward trend," Romesh Sobti, managing director and chief executive of IndusInd Bank told analysts after the bank's third quarter earnings.

The private lender has also improved its cost-to-income ratio sequentially by 75-77 basis points. It is currently at around 47% and the bank aims to improve it further to 45% in next 18-24 months.

"I think for a balanced universal bank like us, cost-income ratio around 45% would be sort of an ideal ratio. So, I think sustainability is around the cost-income ratio. Operating expense will not see any large blips now and then," Sobti said.

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