Axis Bank Ltd will report its fiscal third quarter results on Wednesday, giving a preview of how healthy the earnings picture might look for Indian banks.
Most banking analysts are bullish on the sector’s performance during the quarter ended December as they expect treasury gains to have driven earnings growth. Yield on the 10-year benchmark government bond on Tuesday dipped to 7.65%, its one-year low, and banks may profit from trading in bonds whose prices have been rising since December. Bond prices and yields move in opposite directions.
Most analysts say private sector banks, such as Axis, will record a good performance as treasury profits, mainly equities, and bad loan recoveries are expected to be strong for most banks. Angel Broking Ltd, another domestic brokerage, expects “large capital raising plans” and “aggressive business growth” to drive performance for private banks.
Angel is also bullish on the prospects of large public sector lenders, such as State Bank of India, “with the government approving further equity investment...and allowing issue of preference share capital for shoring up tier-I capital.”
Overall, the public sector banks, according to Angel, will deliver a “moderate growth in core earnings, underpinned by further gains from operating leverage and modest growth in non-interest income.”
Bank stocks have been on a roll since the beginning of fiscal 2007-08. The 18-share Bombay Stock Exchange banking stock index, has risen 96% from April against a 67% rise of the Sensex. Axis shares closed at Rs1,068.65 a share, down 1.91%, or Rs20.85, on Tuesday.
As for Axis, Motilal Oswal Securities Ltd expects it to post 48% growth in net interest income, or the difference between the interest earned on its loans and the interest cost of its deposit liabilities. Its fee income from selling insurance and mutual funds is expected to grow 50%, and third quarter earnings to increase by 49% to Rs280 crore. IL&FS Investsmart Securities Ltd put “a market outperformer” rating on Axis in an earnings preview.
Meanwhile, though growth in bank loans has slowed from 30% to 23%, brokerages expect credit growth to bounce back to 25% by March-end.
P. Chidambaram, finance minister, recently asked public sector banks to cut deposit and lending rates. If they heed the call, rates could go down, potentially boosting credit offtake, analysts say. However, most brokerages cautioun against an increase in non-performing assets (NPAs) in banks’ retail business.
IL&FS research shows banks have reported a lower credit deposit ratio in September-November. Another brokerage Sharekhan Ltd says “banks may prefer to utilize the higher treasury gains” to mark higher provisions for their NPAs.
Rating agency Crisil Ltd said on Tuesday gross NPAs in retail loans will rise to 4% over the next two years from 2.7% as of March.