Mumbai: State Bank of India (SBI), India’s biggest lender, and its peers may report lower profits this fiscal year as the highest lending rates in eight years deter customers from taking out auto and home loans.
SBI, a 200-year-old bank, said on 7 April it would charge its best borrowers 12.75%, the highest since April 1999.
ICICI Bank Ltd on 31 March added a percentage point to home-loan rates, a day after India’s central bank raised borrowing costs for the sixth time in 14 months.
Goldman Sachs Group Inc., HSBC Holdings Plc. and the Asian Development Bank (ADB) last week forecast that economic growth will slow this year as the Reserve Bank of India (RBI) raised borrowing costs and banks’ reserve requirements. Higher credit costs may shave a third off loan growth, said Krishnan Sitaraman, head of financial sector ratings at Crisil Ltd, the Indian unit of Standard & Poor’s Ratings Services.
“The increase in cash reserves means banks must lock up more funds that otherwise could have been deployed profitably,” Sitaraman said. “That will put some pressure on banks’ profitability.”
RBI governor Y. Venugopal Reddy on 30 March unexpectedly increased the overnight lending rate to a four-and-a-half-year high of 7.75%. The monetary authority also told lenders to raise reserves to 6.5% of deposits by 28 April, effectively draining as much as Rs15,500 crore ($3.6 billion) from the banking system.
The credit squeeze caused a slump in shares last week of companies whose sales are linked to home and consumer loans.
Car maker Maruti Udyog Ltd was the biggest decliner on the benchmark Sensex, followed by Hero Honda Motor Co. and Tata Motors Ltd. Property developer Unitech Ltd, had the biggest fall in two months.
ICICI Bank, the nation’s biggest mortgage lender, may witness a slow profit growth as it passes on rate increases to maintain lending margins, deterring borrowers, said Anil Agarwal and Anil Bang, analysts at Morgan Stanley, in a research report dated 2 April. Also, rising rates will cause lenders to incur losses on bond portfolios.
“Higher lending rates will have an impact on loan growth, especially in mortgages,” their report said. “Given the weaker interest income and a likely increase in costs, profitability is likely to be weak for banks with large mortgage loan books.”
ICICI Bank has raised the rate it charges its best clients, known as the prime rate, by 4.5 percentage points since February 2006 to 15.75%. The bank, on 20 January had reported that its third-quarter profit rose 42% to a record Rs910 crore on soaring loan growth.
Monthly repayments made by ICICI Bank’s mortgage borrowers probably rose 20% in the past six months following rate increases by RBI, Sanjay Jain and Aditya Singhania, analysts at Credit Suisse Group, said in a report dated 2 April. The bank’s retail lending, including mortgages that make 30% of its loans, will slow following the rate increases, K.V. Kamath, chief executive officer, ICICI Bank, had said on 12 March.
Growth in home-loan portfolios is already slowing, according to Morgan Stanley. ICICI Bank added 11% more mortgage loans in December from a year earlier, compared with 40% in June, according to the report.
Growth in bank credit may decline to 20% this business year, said Sitaraman. Bank lending increased more than 30%, the fastest in three decades, in each of the last three fiscal years, RBI data shows. ICICI Bank’s profit growth may slow to 15.9% this fiscal year, compared with an estimated 27.6% last year, said analysts at Credit Suisse.
Profit growth accelerated to 27% in the 12 months ended March 2006 from 22% in the previous year, according to data on its website, as economic growth boosted credit expansion.
Asia’s fourth-largest economy will grow 8% in the year ended 31 March, Ifzal Ali, chief economist of ADB, and Goldman economists Tushar Poddar and Mark Tan had said in separate reports last week. HSBC economist Robert Prior-Wandesforde expects 7.8%.
India’s economy grew 9.2% last fiscal year, according to the government, following a 9% expansion the previous year. Banks’ profits may also be hurt by losses on bond holdings, the analysts at Morgan Stanley said. Yields on benchmark 10-year government bonds, which move opposite to prices, rose to the highest in almost eight months on 3 April in reaction to the central bank’s action.
“As interest rates rise, banks’ bond portfolios will take greater losses,” Morgan Stanley said. While government bond yields are rising, “corporate bond yields have risen even more, implying significant losses for UTI Bank and HDFC Bank, which hold large corporate bond portfolios”, they wrote.