Mum bai: Earnings growth at India’s private banks in the quarter ended 30 September is likely to outpace state-owned lenders that are hobbled by bad loans, analysts said.
Local banks are expected to report an annual earnings growth of 25%, although net interest income—the difference between interest earned and expenses incurred—is likely to be subdued because loan growth has failed to pick up.
“Private sector banks continue to report healthy and consistent operating performance, with earnings growth of 28.4% year-on-year and 7.7% quarter-on-quarter. HDFC Bank Ltd, ICICI Bank Ltd and IndusInd Bank Ltd will outpace private sector banks’ aggregate earnings growth,” Kisan Ratilal Choksey Shares and Securities Pvt. Ltd said in a Monday report.
The brokerage expects earnings to be down 4.8% from the preceding quarter, but higher trading gains, better cash recoveries and stable provisions are likely to help them.
Public sector banks will also be helped because of favourable tax treatment after providing for bad loans, according to Vaibhav Agrawal, vice-president of research and banking at Angel Broking Ltd.
“Overall, the trend of private banks doing better will continue as public sector banks still have a high amount of NPAs (non-performing assets). We expect private bank earnings to rise 25% while public sector banks, excluding State Bank of India, will see a 15% rise in earnings,” Agrawal said.
The subdued rise in loan growth will impact net interest income during the quarter.
“Sequentially, only a small rise in advances as also flat NIMs (net interest margins) are expected to result in NII (net interest income) growth of 14% y-o-y (year-on-year) for our banking universe. While PSU banks’ NII is seen up 10% y-o-y, private banks are likely to see 24% y-o-y rise,” IDFC Securities Ltd said in a Friday report.
NIM, the difference between interest earned and expended, is a key measure of profitability.
The September quarter has seen banks cut lending and deposit rates as they adjusted to an improvement in banking liquidity after the Reserve Bank of India (RBI) reduced the cash reserve ratio (CRR) to 4.5% from 4.75%, releasing about Rs.17,000 crore into the system. CRR is the portion of deposits lenders have to hold with the central bank.
State Bank of India (SBI), the largest bank in the country, cut its minimum lending rate by 25 basis points (bps) to 9.75%. It also cut its benchmark prime lending rate by 25 bps to 14.50% just days after RBI’s monetary policy announcement last month. One bps equals one-hundredth of a percentage point.
SBI also took the lead in cutting deposit rates in September, followed by ICICI, HDFC Bank and Axis Bank. The lenders have cut interest rates on fixed deposits for individual account holders by 0.5 percentage points.
NIMs are likely to remain steady as the cut in deposit rates will be offset by a similar decline in lending rates by banks, analysts said.
A slowdown in credit growth could impact banks’ ability to price loans and therefore impact magins, IDFC Securities said in its note.
“Credit growth for the industry stood at a mere 16% y-o-y (flat q-o-q or quarter on quarter) as per RBI data dated 21 September 2012. Deposit increased at 14.3% y-o-y, indicating a sequential rise of a mere 1.5%,” IDFC Securities said.
Bank margins could be affected in the quarter ended September, said V. Sri Karthik, analyst at Espirito Santo Securities Ltd. “There has been a significant reduction in lending rates during the quarter. This, along with the decline in short-term deposit rates, could have a 5 basis point impact on the margins of overall sector in the second quarter.”
While the impact of rising bad loans will be mixed among state-owned banks, private lenders, except Axis Bank, are expected to register a decline in these, he said. Axis could see a slight increase in its bad loans, Karthik said. Analysts are unanimous that bad loans at public banks will continue to grow at a faster clip than private banks, though recovery will improve compared with the June quarter.
State-owned banks will also restructure more loans given to state electricity utilities, textile units and small to medium-sized companies, Kisan Ratilal Choksey said in its note.
The 14-share Bankex index gained 0.7% to 13,143.02 points on Tuesday on BSE Ltd; the benchmark Sensex index rose 0.45% to 18,793.36.