Most private sector banks, that have so far declared earnings for the December quarter, have taken analysts by surprise, beating profit expectations by a wide margin. They have managed this due to higher fee income and rising demand for loans from individuals and companies. Mint spoke to Aditi Thapliyal, banking analyst at Noble Group Ltd,on whether this run was sustainable. Edited excerpts:
Despite credit growth being on the lower side, how have banks been able to beat Street profit expectations? Is this sustainable?
The banking result season has just begun. The majority of results for public sector (PSU) banks are still pending and we are doubtful if PSU banks will be able to report the same kind of earnings surprise as their private sector peers.
PSU edge: A Punjab National Bank in Rohtak, Haryana. State-owned banks have access to low-cost deposits, better credit quality. Harikrishna Katragadda / Mint
The reasons why we say this are: there is likely to be yield pressure from lower loan growth; PSU banks are likely to have lower treasury gains in the earlier quarters. We have already seen that in the case of their private sector peers. You are also likely to see higher credit cost for some PSU banks as they comply with the 70% RBI (Reserve Bank of India) provisioning requirement.
How are banks managing cost of funds? How are they increasing their net interest margins?
Part of the reason why net interest margins have increased in the past two quarters and Q3 has been because cost of credit is trending downwards. But going forward, we believe that cost management for banks will be the banks’ ability to increase its low-cost deposits as systemic interest rates trend upwards.
What are your thoughts about the asset quality of banks? How are these teaser rates and the like going to affect this?
Considering the phase of the economic recovery we are in, it is difficult to see the non-performing assets of banks rising substantially. However, that being said, there is a fair degree of opacity around re-structured loans, particularly for PSU banks. Even to this day, only 4-4.5% of the loan book has been restructured and we have already seen some negative surprises in the last quarter for some of the tier I PSU banks. So outlook depends on how restructured loans behave.
What about outlook on loan growth?
Our optimistic assumption for loan growth is 15% for 2010. I would recommend not looking at last fortnight’s number of Rs80,000 crore increase in loan growth. What we hear from our network and secondary sources is that this is artificial growth. I would look at two more fortnights before that number is seen as something that is likely to be repeated.
Would you say that private sector banks are better bets for investors?
PSU banks trade at a discount to private sector players due to concerns of political interference, (poor) management incentives and inability to hire best middle managers. What is not appreciated by consensus (analyst opinion) is that PSU banks have formidable advantages in terms of access to low-cost deposits, access to government business and better credit quality. Along with this, on a range of fundamentals, tier I PSU banks have done much better. So considering this, valuations are bizarre.
If you have a long-term view, you might want to pick tier I PSU banks rather than the more expensive private sector banks. But at this juncture of the credit cycle, PSU banks are likely to underperform as bond yields trend upwards.