Analysts expect banks to declare good results for the April-June quarter, riding a stable interest rate regime and a decline in inflation. HDFC Bank Ltd will kick off the earnings season on Tuesday.
In the April-June quarter, the first of the financial year for most Indian banks that follow an April-March accounting year, Bankex, the banking index of the Bombay Stock Exchange (BSE) comprising 16 stocks returned 22.4%. This is against the 12.07% returns of the exchange’s benchmark 30-share index, Sensex.
However, analysts have sounded a note of caution on the deterioration of asset quality and said the non-performing assets (NPAs or bad loans) of banks could be growing. They add that this will affect performance in the medium term as the banks will have to make provisions to take care of rising distressed assets.
In its report, “India Financial Services”, released last week, Goldman Sachs, a foreign financial services firm, says that the prospects for the banking sector look good because of stable macro economic conditions. “Indicators of the macro economic environment, such as industrial production, have shown remarkable resilience despite the tightening measures over the past 18 months implying that the growth fundamentals remain intact,” the report adds.
This, the report says, could drive growth in the consumer and corporate lending segments.
Another international financial services firm CLSA, in its earnings preview, says that banks will be a significant contributor to incremental earnings growth for Indian firms in the upcoming results season. Projecting a 27% growth in credit and 23% growth in deposits, the preview says: “Lending rate hike at the beginning of the quarter will improve margins as deposit costs increase with a time lag.” The preview, however, says that the asset quality of banks could go down as a result of recent hikes in lending rates.
Merrill Lynch’s earnings forecast is also bullish, particularly on private sector banks. “We expect private sector banks to show strong growth in earnings at over 25%, led principally by stronger loan growth and sustained buoyancy in fee revenues,” the forecast says. Public sector banks, according to Merrill Lynch, could post relatively weaker earnings owing to a more modest fee growth at 15-18% and higher credit costs.
The net profit of Indian private sector banks grew by 35.86% in 2006-07 over the previous year on a 50.31% growth in total income. In contrast, the net profit of public sector banks in the year grew by 21.85%, while total income increased by 18.18%.
Man Financial, another interational brokerage, also expects good earnings numbers from banks owing to a broad-based growth in the credit portfolio. This, it says, is despite the retail portfolio of private sector banking majors such as ICICI Bank and HDFC Bank moving towards high risk yielding assets such as personal loans and credit cards. A report by Man Financial adds that these account for a small percentage of the total bank credit and says that a broadbased demand for various loans will spur the growth momentum of banks.
Citigroup, in its July 2007 strategy report, recommends that investors go “overweight” on the banking sector (or buy banking stocks). Liquidity, which was a major concern for banks till about six months ago, will ease up now with a moderation in credit growth and inflation under control, the report says.
“Now, both key indicators are within or near FY08 targets (credit growth 24-25% and inflation 5%). After already tightening significantly, we believe the Reserve Bank of India is unlikely to tighten further as that would pose a risk to growth,” the report adds.
Domestic financial services firm, Enam Securities, expects public sector banks to report stable margins as most of them have been able to re-price a substantial (50-60%) part of their loan portfolio upwards from May 2006 onwards.