Mumbai: Indian banks could see profits under pressure in the first half of FY12 but lower government borrowing, rising consumer demand and expectations that interest rates will ease could boost earnings in the second half.
“We believe FY12 is likely to be a tale of two halves where the first half is likely to see subdued credit growth and margins whereas the second half is likely to see materially falling credit costs with recovery in margins,” Macquarie Research said in a note last month.
Country’s central bank has raised rates seven times since March last year, and another hike is widely expected in the mid-quarter policy review on 17 March, and could prompt further deposit rate hikes by banks in a bid to lure investors, although at the cost of profitability.
Banks, including top lenders ICICI Bank and State Bank of India have warned that rising interest rates in India could dampen the outlook for banks’ earnings growth in the near-term, despite a strong December quarter.
“Given the kind of interest rates scenario that we are witnessing, unless the interest rates stabilise it will be very difficult for banks going forward to maintain the growth momentum and go on increasing the base rate also,” S.C. Kalia, executive director, Union Bank of India, said.
Most banks that Reuters interviewed expected credit growth of 22-25% in FY12 - almost the same level as FY11 - but said deposit growth could also see a boost in the period, unlike in FY11.
State-run Canara Bank has pegged FY12 credit growth at 23-24%, while deposits are likely to grow 18-19%. Corporation Bank sees advances up 25% in the next financial year and deposits by 20%.
Indian bank loans rose 23.2% on year as of 25 Feb., compared with the Reserve Bank of India’s projection of 20% for 2010-11.
Deposits were up 16.4% from a year earlier, compared with the RBI’s projection of 18%.
But, Macquarie Research does not expect credit growth to see the “heady levels” of more than 25% in FY12 and expects it to grow at around 20%, though in the near-term it could come down to sub-17% levels due to absence of 3G funding.
A failure in pick-up of capex cycle due to higher interest rates and delay in project approvals and executions, which are bogged down by environmental clearance and fuel linkage issues could also hurt credit growth in the short-term.
A spate of corruption scandals, meanwhile, has also slowed decision-making by the government.
Though most bank officials were not pertubed by asset quality as of now, they said concerns could return if inflation and interest rates continued to rise.
B.A. Prabhakar, executive director of Bank of India, said in the current macro-economic situation, asset quality was a prime concern for lenders.
“The only risk, I see, (for banks) is of asset quality,” he said.
“Look at the way things are developing now - Uncertainty continuing in global situation, inflation rate continuing, if this continues, definitely small and medium sectors will face problems,” he added.
Crisil Ratings has projected gross non-performing assets (NPA) levels in the Indian banking system at around 3% by March 2012 compared with 2.4% as on March 2010.
“The increase will be largely driven by fresh slippages from relatively vulnerable and leveraged sectors, tighter liquidity, higher cost of borrowings and non-performance of some erstwhile restructured assets,” Crisil’s director Pawan Agrawal said.