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Business News/ Market / Mark-to-market/  Banking rally may run out of steam unless the economy recovers
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Banking rally may run out of steam unless the economy recovers

Slowing economic growth and the volatile rupee mean that the bad loans problems are going to persist

While falling earnings may act as a brake for the current rally, the outlook for the medium term remains hazy as well. Photo: Hemant Mishra/Mint (Hemant Mishra/Mint)Premium
While falling earnings may act as a brake for the current rally, the outlook for the medium term remains hazy as well. Photo: Hemant Mishra/Mint
(Hemant Mishra/Mint)

The BSE Bankex index has seen a rebound in recent times, an indication that investors are expecting to see better days. The Reserve Bank of India (RBI) rolling back some of its liquidity tightening measures and the recent spurt seen in bank credit growth are a few silver linings for the industry. But the drag from slowing economic growth and the central bank’s reversal of its monetary policy stance in the last review threaten to drag the industry deeper into an asset quality morass. Such has been the uncertainty in recent times that even private sector banks, whose earnings have been relatively insulated for the past few quarters, will feel the stress.

Brokerage estimates for private bank’s profit growth range from 11% to 13% for the September quarter compared to 20-25% in April-June. For public sector banks, the situation is far direr with many likely to see an earnings contraction.

The reasons are not far to see. For one, even if loan growth has touched 18% from a year ago at the end of September, and will result in higher net interest income, it doesn’t necessarily mean better profitability. Deposit growth has been lagging behind at 14%. Thus, the cost of fund raising from alternative, short-term sources shot up as much 2 percentage points during the quarter owing to RBI’s liquidity tightening measures. Sure, in some cases, banks did raise interest rates, but the pressure on net interest margins would remain.

Secondly, one reason for the relatively decent show by banks in the first quarter was treasury gains from falling bond prices.

But in the September quarter, yields on the 10-year government paper increased 1.3 percentage points. That could likely lead banks to report mark-to-market losses. But this has to be weighed against RBI giving banks one-time permission to shift their government securities holdings from available for sale (AFS) or held for trading (HFT) to hold to maturity (HTM) category and allowing them to spread their losses over three quarters.

Thirdly, slowing economic growth and the volatile rupee mean that the bad loan problems are going to persist. Corporate debt restructuring cases are continuing to pile up and even in the case of some retail loan categories such as commercial vehicle, pressures may surface. Higher provisioning expenses on these loans will also affect bank bottom lines.

While falling earnings may act as a brake for the current rally, the outlook for the medium term remains hazy as well. RBI’s assurance on liquidity will help to an extent. However, the spurt in credit which has happened in recent times due to firms’ reluctance to access the money market will also ease. Unless the broader economy recovers, this banking rally will run out of wind.

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Published: 13 Oct 2013, 04:24 PM IST
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