Mumbai: India’s banks are expected to post marginally better results for the three months ending September compared with the previous quarter, as two lending rate hikes have softened the impact of high funding costs.
Both public and private sector banks are battling stretched liquidity on the back of monetary tightening by banking regulator Reserve Bank of India, or RBI.
But demand from oil marketing and fertilizer firms has propped up credit growth during the second quarter, analysts said. Latest RBI data show bank credit increased 26.1% year-on-year for the week ended 12 September. RBI wants banks to limit credit growth to 20%.
“Because of the tight liquidity situation, the pricing power for banks is still there, so margins are not a greater concern,” said P.S. Subramaniam, an analyst at SBI Capital Markets Ltd.
Public sector banks raised their lending rates by 50 basis points in end-June and by another 75-100 basis points in August, while deposit rates were increased by 75-100 basis points, allowing banks a spread of 25-50 basis points. A hundred basis points equal a percentage point.
So far this fiscal year, RBI has raised its policy rate by 125 basis points, and the cash reserve ratio, or the amount of funds banks have to keep with the central bank, to cool inflation that touched a 16-year high in August.
Private banks are expected to show continuing improvement in quarterly profits but public sector banks could see only a marginal rise from the preceding three months, according to four analysts Mint spoke with.
Bank of India is expected to fare well among public banks while Axis Bank Ltd could be the best private sector performer in the quarter.
“On a sectoral basis, there won’t be much positive surprise, but negative surprises are completely ruled out,” said an analyst with a public sector bank’s brokerage arm. He and the other analysts didn’t want to be named as they are in the process of preparing notes to clients on the results.
Profits for public banks will likely be dented by the additional provisions they have to set aside during the quarter towards the government’s Rs72,680 crore farm loan waiver scheme. These banks have to set aside about Rs3,600 crore in provisions to cover for loans written off from their accounts as RBI doesn’t want them to treat these as “performing” assets unless provisions are made on their balance sheets.
On fee income, private banks might see a slowdown and public sector banks should be able to maintain their 12-18% growth, analysts said.
About 45-50% of private banks’ income is earned from fee-based activities but cross-selling opportunities could have been hit because of the turmoil in global financial markets.
“The streams for such activities are drying down for private sector banks,” said the same public sector bank analyst quoted earlier.
Treasury income is likely to have increased during the quarter as bond yields dropped from a peak of 9.47% in mid-July to about 8% in mid-September.
According to bond dealers, state-owned banks booked heavy profits in September, a main reason for the yield on the 10-year bond rise to 8.6% in just a week.
Bankex, or the index of banking stocks in India, dipped 23.34% in the first quarter, to 5,915.98. In the second quarter so far, Bankex is up 4.38% to 6,175.1. On a year-to-date basis, Bankex is down 45.92%.