Banks Spend More In Q1 As Employee Costs Continue To Mount

The rising operating expenses may be something to watch out for in the Indian banking system as lenders rapidly expand their operations and upgrade their technology.

An overview of the Q1 results posted so far shows that opex has risen sequentially in the quarter-ended June.

Given the need for rapid expansion, primarily due to digitisation, banks that saw such a rise include HDFC Bank Ltd., Axis Bank Ltd., ICICI Bank Ltd., IndusInd Bank Ltd., Kotak Mahindra Bank Ltd., and Yes Bank Ltd.

Some others like Union Bank of India and IDBI Bank Ltd. reported a decline.

In the case of HDFC Bank, the rise in opex was explained by setting up of 1,479 new branches and 1,597 automated teller machines or cash deposit and withdrawal machines, according to the annual report.

For Axis Bank, the rising opex was due to the Citi retail business running at a higher cost and return ratio. It will be return on equity accretive after the integration phase, Puneet Sharma, chief financial officer of Axis Bank, told analysts last month.

The rise in operational cost has also come with an increase in employee cost due to an ongoing talent war among lenders.

“Opex among commercial banks is rising due to digitisation but these banks are not able to bear down their brick-and-mortar touch points," said Karan Mehrishi, independent economy commentator. "...banks are also hiring some very expensive personnel due to investments in IT infrastructure, artificial intelligence and big data.”

An overview of the data across quarters indicates that employee costs are rising faster than opex for banks, Mehrishi said.

When deposits get repriced in a rising interest rate scenario, banks face the pressure on their margin; the focus then shifts to opex as it is one of the few components that banks can control.

Banks don't mind rising costs because of their rapid expansionary plans and when entities come in capex mode, they tend to view opex as a front-end cost, said Vinit Bolinjkar, head of research, Ventura Securities Ltd.

Given the current economic landscape and need for tech advancement, analysts expect costs to rise in the near-term for banks. A report by McKinsey & Co. released on Wednesday said that despite healthy return on assets, factors such as slower deposit growth, fee income decline and rising operational expenses could hurt profitability for lenders.

The report also gave a 'negative' outlook to bank opex in case no action is taken. If the rise continues, banks are looking at increased attrition and competition for skilled talent, which will further drive higher personnel costs.

"At this stage, rising opex is nothing to worry about because it is a new credit cycle. Moreover, it is rising for income and growth purposes," said Amit Khurana, head of equity at Dolat Capital. "In case it starts rising for areas other than revenue generation, then we may need to worry about it. It's better to wait for a couple of quarters and then assess the situation."