We expect a 4.9% year-on-year (y-o-y) drop in banks’ profit in the third quarter of the fiscal year 2009-10, chiefly due to slowing business growth, subdued net interest income (NII) growth and likely treasury losses.
In the third quarter of FY10, credit growth decelerated (11.3% y-o-y, 2.4% quarter-on-quarter, or q-o-q). This is slower than the 12.6% growth in the previous quarter and 24.6% a year earlier. The lower incremental credit-deposit ratio, at 48.7% year-to-date (against 82.9% a year ago), should affect NII growth, in our view.
Also See Subdued Growth (Graphics)
Falling yields and funds parked in low-yielding government securities should result in declining net interest margins (NIMs) q-o-q. Nevertheless, in the third quarter of FY10, banks’ cost of funds, both retail and wholesale, has also been on the decline.
This should, to an extent, help support NIMs. For our banking universe, we expect NII growth of 10.5% y-o-y and 11.4% q-o-q.
During the quarter, the 10-year government securities yield was up 42 basis points on Q3FY09, implying no treasury gains. The five-year government security has also hardened, though less—from 7.1% to 7.3%.
Mark-to-market (MTM) losses, however, are unlikely to be very large, in spite of hardening yields, as shorter maturity government securities yields have been flat, banks have indicated a higher proportion of low duration investments in AFS and incremental government securities investments by banks are expected to be of shorter maturity.
However, it is likely that gains on banks’ equity investments could partially compensate for MTM losses on their debt investments.
As banks made provision in the first half of FY10 for a large part of non-performing assets (NPAs) and restructured loans, further NPA provisioning is likely to be lower.
Percentage-wise, credit costs should be high. From our interaction with the bank management, we have been told that incremental restructuring has been low. We do not expect large provisioning on account of restructured loans.
However, State Bank of India (SBI), ICICI Bank Ltd and Canara Bank could make higher NPA provisions to comply with the Reserve Bank of India’s guideline on NPA provision coverage (70% by September).
For our banking universe, we expect NII to grow 10.5% y-o-y and 11.4% q-o-q. We also expect net profit to decline 4.9% y-o-y and grow 2.2% q-o-q.
We expect HDFC Bank Ltd, Axis Bank Ltd and IndusInd Bank Ltd to be the leaders among private sector banks. IDBI Bank Ltd, Bank of Baroda and SBI are likely to show better profit growth than their public sector peers. ICICI Bank, Punjab National Bank, Union Bank of India and Canara Bank could turn out to be the laggards.
Graphics by Ahmed Raza Khan/Mint