Analysts predict dull earnings season for banks

Analysts predict dull earnings season for banks
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First Published: Mon, Jul 14 2008. 01 12 AM IST

On rough track : State-run banks such as State Bank of India pared borrowing costs in February, nudged by a Union government keen to bolster economic growth, a move that lowered their interest income.
On rough track : State-run banks such as State Bank of India pared borrowing costs in February, nudged by a Union government keen to bolster economic growth, a move that lowered their interest income.
Updated: Mon, Jul 14 2008. 01 12 AM IST
Mumbai: India’s banks, buffeted by rough economic headwinds, are expected to post lacklustre fiscal first quarter earnings as deposit costs rose, consumer loan demand slowed and they set aside more money to cover losses on government bond holdings, analysts say.
Axix Bank Ltd, formerly known as UTI Bank Ltd, one of the so-called new generation private sector banks, kicks off the earnings season for lenders on Monday by unveiling its results for the April-June quarter.
Public sector banks led by State Bank of India (SBI), the nation’s largest lender which make up 70% of the industry’s assets, were the hardest hit in the quarter. State-run banks pared borrowing costs in February, nudged by a Union government keen to bolster economic growth, a move that lowered their interest income.
As surging inflation forced the Reserve Bank of India (RBI), the central bank, to raise its key short-term lending rate by 75 basis points in June, public sector banks restored their loan rates, but that impact will only be reflected in second quarter earnings.
One basis point is one hundredth of a percentage point.
RBI’s war against inflation also included a 125 basis point increase in the cash reserve ratio, or the proportion of their deposits banks have to set aside, that reduced the amount of cash available for banks to lend.
“We expect private as well as public sector banks to...report a fall in margins on a quarter-on-quarter basis..,” Motilal Oswal Securities Ltd analysts Manish Karwa, Ajinkya Dhavale and Alpesh Mehta wrote in a research report.
Inflationary pressure and monetary tightening by the RBI will lead to “rising cost of funds for the sector”, they wrote.
On rough track : State-run banks such as State Bank of India pared borrowing costs in February, nudged by a Union government keen to bolster economic growth, a move that lowered their interest income.
While loan rates have risen by 50 basis points, banks have raised their deposit rates by between 25 and 100 basis points across maturities.
This means the spread between what banks pay for funds and earn from loans has shrunk.
Private banks are likely to fare better because they benefited by “capital raising in FY08 and improvement in low-cost deposits ratio and repricing of the bulk deposits at the lower rates in the fourth quarter of fiscal 2008”, Motilal Oswal said.
Higher borrowing costs and price inflation have slowed consumer demand for loans to finance the purchases of houses and apartments, cars and consumer durables. Some large banks such as ICICI Bank Ltd, SBI and other public sector banks have slowed retail loan disbursements because of mounting defaults, according to Motilal Oswal.
Public sector banks benefited from growth in credit to oil-marketing firms that needed more working capital because of the rising cost of crude oil. Overall, the banking system’s credit grew 25.9% year-on-year as on 27 June, according to RBI data. But credit demand from oil marketing companies will decline as RBI has started offering liquidity to these firms through special open market operations, analysts say.
Banks’ first quarter profitability will be hit by “myriad concerns” from adverse economic trends to rising concerns on asset quality, said Mumbai-based brokerage Sharekhan Ltd. “While the business growth is robust, nearly every revenue stream of banks has been affected by adverse developments in the recent months,” it said in a report.
Banks were also hit by rising bond yields, which move inversely to price. The yield on the benchmark 10-year government bond, around 7.5% at the beginning of the calendar year, has now risen to 9.5%.
That will force banks to provide money to cover their mark-to-market (MTM) losses on their bond portfolio. Marking to market is an accounting practice of valuing an investment in line with its current market price. Motilal Oswal expects higher MTM provisions at State Bank of India, Oriental Bank of Commerce, Canara Bank, Indian Bank and Federal Bank.
While non-interest income growth is expected to weaken because of a decline in treasury income and capital market-related fee income, MTM provisioning will increase substantially, denting bank profits, Sharekhan said in the report.
Banks’ interest margins and asset quality will remain under pressure in the next few quarters, Angel Broking Ltd said in a report, clouding the outlook for their stock prices.
“Nonetheless, we believe long-term prospects remain strong, especially for large private banks that continue to gain market share, have strong core profitability and are available at attractive valuations,” said the brokerage.
The risk of lower credit growth and MTM losses are largely priced into bank stocks, “hence the downside from current levels would be minimal,” according to Religare Securities Ltd.
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First Published: Mon, Jul 14 2008. 01 12 AM IST