The latest numbers from the Reserve Bank of India (RBI) show that while credit growth has eased a bit, it is still strong, up 21.4% over a year ago. That, combined with the low base for three months ended March 2010, will drive earnings for banks in the fourth quarter of fiscal 2011.
However, the tougher macroeconomic environment in the form of higher interest rates, tighter liquidity and an inflation rate that RBI is still uncomfortable with, means that net interest margins for banks will be under pressure. Indeed, many banks had indicated as much after their third quarter results.
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Brokerages reckon net interest margins may decline by up to 20 basis points from the third quarter levels, especially for smaller banks that don’t have the luxury of a large bank network and, hence, a lower proportion of low-cost current and savings deposits. One basis point is one-hundredth of a percentage point.
Despite banks hiking deposit rates by up to 1.25 percentage points in the past few months, the credit-deposit ratio is hovering around 75.6, not much different from a quarter ago. However, the key question is whether banks still retain the pricing power to raise lending rates.
Sure, liquidity concerns may ease in the next couple of quarters; liquidity adjustment facility borrowings averaged Rs 70,000 crore in the last week of March compared with Rs 1 trillion at the beginning of the fourth quarter. However, deposit rate increases operate with a lag and higher funding costs are likely to hurt net interest margins over the next couple of quarters as well, even as RBI continues to hike rates to keep inflation in check.
Still, asset quality has generally improved for the whole system in the last fiscal. Angel Broking Ltd calculates that the net non-performing assets (NPA) ratio has declined to 0.99% for the December quarter from a peak of 1.15% in the year-ago period. With RBI extending the deadline to move to a new system of recognizing NPAs, there might not be any surprises in this metric for the fourth quarter, at least for private sector banks.
For public sector banks, there is also the googly of pension liabilities after new settlement packages were finalized in the third quarter. While banks are allowed to amortize these liabilities over five years, the portion that goes to retired employees has to be provided for in fiscal 2011. This can be as high as 26% of public sector banks’ post-tax earnings in the fourth quarter, reckons Prabhudas Lilladher Pvt. Ltd.
Overall, the consensus is that private banks will post more robust results than their public sector peers in the fourth quarter.
Graphic by Yogesh Kumar/Mint
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