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Business News/ Companies / Banks’ Q4 seen strong on loan demand; margins to soften
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Banks’ Q4 seen strong on loan demand; margins to soften

Banks’ Q4 seen strong on loan demand; margins to soften

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Mumbai: Credit growth at India’s leading banks is likely to slow down in the coming months after a series of interest rate hikes in Asia’s third-largest economy to tame inflation and margins may come under pressure due to rise in deposit rates.

State Bank of India, ICICI Bank and HDFC Bank -- the country’s top lenders -- are expected to report strong profit growth in the March quarter, bolstered by a rise in corporate loan demand and fee income.

“We expect the credit growth to moderate in this fiscal due to high rates, but the banks’ earnings outlook is positive in the long term and that’s why we continue to hold on to the stocks," said Stefan Hagman, a Stockholm-based portfolio manager with Handelsbanken Intia.

India’s economy is expected to have grown 8.6% in the fiscal year ended on 31 March, boosting demand for mortgage and automobile loans as well as credit offtake by companies.

But high inflation, combined with a tight monetary policy, could drag on the credit growth this fiscal year.

The Reserve Bank of India (RBI) is widely expected to raise both its short-term policy interest rates by 25 basis points each at its next review on 3 May, which would be the ninth increase since March 2010, to tame high inflation.

India’s wholesale price index probably rose 8.36% in March from a year earlier, slightly higher than February’s 8.31% rise as fuel and manufacturing prices continued to climb, a Reuters poll showed on Monday. The data will be released on Friday.

“The key macro concerns like inflation and monetary tightening continue to cast shadow on the economy’s growth which may affect the credit environment," brokerage Sharekhan said in its earnings preview report.

Bank loans in India rose 21.4% on year as of 25 March, according to the central bank’s latest data, slowing from the 24.4% rise on year as of 31 December last year.

Margin Pressure

Analysts expect pressure on leading banks’ net interest margins, a key gauge of profitability, in the coming months due to a series of deposit rates hikes in the recent months to keep pace with the surge in lending rates.

“We expect it (margins) to come under pressure but that is well understood and has been priced in," said Hagman of Handelsbanken Intia, which holds the top three Indian banks in the portfolio.

Banks such as ICICI Bank and HDFC Bank are seeing an improvement in their asset quality as improved business and consumer sentiment in a fast-growing economy result in fewer bad loans.

State Bank of India, the country’s top lender, does not see “too much strain" on its profits in the near future due to bad-loans provisioning, its Managing Director Hemant Contractor said on Friday.

State Bank may report a nearly 63% jump in its quarterly profit, mainly due to low base of last year, according to a Reuters poll. The bank had reported an unexpected 32% drop in the year-ago period, hit by a jump in bad-loan provisions.

The central bank has made it mandatory for Indian banks to gradually reach a provision cover ratio of 70%.

At State Bank, focus will be on comments on loan growth and bad-loans outlook for this fiscal year by its new management, which took over under the chairmanship of Pratip Chaudhuri earlier this month.

Shares of State Bank of India, which the market values at nearly $40 billion, are up 0.3% this year and HDFC Bank has risen 1%. ICICI Bank has fallen 1.5%, while the main market has dropped 4%.

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Published: 14 Apr 2011, 01:54 PM IST
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