Amidst the rising concerns at the macro level, the business growth at the industry level remained strong in Q3FY2009.
The year-till-date (YTD) credit growth (till 19 December, 2008) stands at 24.4%, better than the ~22.0% credit growth recorded in the comparable period of the last year.
The healthy credit demand is primarily due to the fact that alternative funding sources (external commercial borrowings, foreign currency convertible bonds) have dried up with rising risk aversion.
Though the role of domestic banks has increased, we believe that the credit growth is expected to moderate going forward on the back of the economic slowdown.
NIMs likely to remain flat
The net interest margin (NIM) for most of the banks under our coverage is likely to remain stable as we believe that the aggressive cuts in reserve requirements cash reserve requirement (CRR) cut by 400 basis points (including the 50-basis-point cut effective January 17, 2009) would help offset the cuts in the prime lending rates (PLRs; of 50-75 basis points effective in Q3FY2009).
The bond yields continued their declining trend during Q3FY2009 and have come off by ~300 basis points since Q2FY2009. Consequently, banks are likely to write back the marked-to-market (MTM) provisions made during the first quarter of the current fiscal.
The impact of this is likely to be more pronounced in case of the public sector banks (PSBs; especially State Bank of India [SBI] and Union Bank of India [UBI]).
However, the extent of the write-backs would depend on the changes in the composition of bank’s investment portfolio during the quarter and the timing of realisation of write-back benefit.
In addition to the concerns over profitability, worries over the quality of assets of banks are on rise owing to the slowing economic growth and the after-effects of the high interest rates.
Already, industry level data has indicated a reversal in trend of improving asset quality. The quality of banks’ assets will remain at the center stage and will be keenly watched in the earnings seasons to come.
For the quarter ended December 2008, we expect Bank of India, Punjab National Bank and State Bank of India from the public sector and HDFC Bank from the private sector to outperform.
Meanwhile, we believe ICICI Bank, HDFC and Allahabad Bank are likely to be among the underperformers.