It is earnings season again for the corporate sector, that time of the year when companies report their financial performance in the previous financial year.
There is no doubt that Securities and Exchange Board of India-mandated publication of quarterly statements on key financial parameters by listed companies has brought about greater transparency in the way that companies function.
However, the mad scramble by the media and analysts to parse the numbers, reflected particularly in the way it focuses on short-term profitability ratios, is also a perverse spin-off.
Take the case of Canara Bank, the largest of the public sector banks based in Karnataka, which reported its results on Friday.
The bank reported a post-tax profit of Rs. 3,021 crore in 2009-10, which was 46 per cent higher than its net profit in 2008-09.
For the first time, in 2009-10, the bank's total volume of business crossed the Rs. 4 lakh-crore mark. However, most media coverage (and analyst verdicts) focused on the fact that the bank has reported a 30 per cent fall in net profits in the fourth quarter (December 2009-March 2010).
There were at least two serious problems with this obsessive focus on the profits in the last quarter.
First, it makes little sense to focus on a single quarter once the results for the entire year are available.
In fact, the significant feature of Canara Bank's results is that its net profit increased 46 per cent during the full year, despite a 30 per cent dip in net profit in the last quarter of the financial year.
The second problem with this view is that it refuses to take into account the factors that led to profits declining sharply during the quarter.
In fact, Canara Bank set aside Rs. 927 crore during the fourth quarter for what in banking industry parlance is referred to as Non-Performing Assets (NPA).
Such assets are loans that are at various stages of delinquency, for which the Reserve Bank of India requires banks to make provisions, depending on how bad they are in the books of the banks.
In fact, if Canara Bank had not made NPA provisions of Rs. 927 crore during the fourth quarter, its net profit in the quarter would have increased by nearly 100 per cent on an annualised basis instead of declining by 30 per cent. Indeed, the Chairman and Managing Director of the bank, A.C. Mahajan, emphasised that the bank had provided more than it ought to as per RBI requirements.
“Our NPA coverage ratio, at 78 per cent, is higher than the 70 per cent coverage that all banks are required to maintain,” Mr. Mahajan said.
The obsession with the behaviour of a single statistical parameter – while ignoring the background in which it arose, and its limited relevance – results in a pig-headed refusal to accept what would logically be seen as prudent financial management.
“We have deliberately chosen to provide more than we are required to because we opted to be on the safer side,” Mr. Mahajan said.
What is even more surprising is the media's bias in handling the public sector banks vis-à-vis their private counterparts.
One of Canara Bank's peers in the private sector, which is also of comparable size, has a higher ratio of NPAs to total assets.
Its NPA coverage was 59.5 per cent at the end of the last financial year, which means that compared to Canara Bank, it carries a higher proportion of risk in its portfolio. But in that case, analysts and the media chose to look the other way.
Keywords: Financial performance