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Rising bad debts cast shadow over Indian bank earnings

Rising bad debts cast shadow over Indian bank earnings
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First Published: Fri, Apr 24 2009. 02 00 PM IST
Updated: Fri, Apr 24 2009. 02 00 PM IST
Mumbai: State Bank of India, the country’s largest lender, is expected to post a 16.3% rise in quarterly net profit on strong loan growth, but rival ICICI Bank could see profit slump by a third on consumer defaults.
Rising bad debts, or non-performing loans, will be in focus at Indian banks in the coming quarters as a sharper-than-expected slowdown in Asia’s third-largest economy hurts jobs and corporate profits.
India’s central bank said in its annual review on Tuesday the economy probably grew 6.5-6.7% in the financial year ended 31 March and would slow to around 6% this year, much smaller than the 8.9% expansion over the last five years.
“In line with the deceleration in the economy, asset-quality pressure is likely to come to the fore in the current quarter,” IDFC SSKI analysts said in a note last week on the Jan-March quarter.
Analysts said revised restructuring norms set by the central bank should have arrested the immediate rise of gross bad debts in the March quarter, but the number will start inching up again.
Banks’s gross non-performing loans will rise to 6.1% of total loans by 2010/11, according to Morgan Stanley. They were at 2.3 percent in 2007/08, as per the central bank. Mounting consumer defaults are expected to hit ICICI Bank harder because it has a greater exposure to retail loans.
For earnings forecasts see table at bottom. State Bank, which along with its associates controls a quarter of the Indian banking deposits and loans, said its net bad debts rose 22% in the December quarter while ICICI’s shot up by more than a third.
Sluggish demand for loans will also skew ratios as defaults begin to accumulate at a faster clip. Indian banks’ loans grew 17.3% in the 12 months till late March, lower than the prior three years which saw 30% expansion a year.
The central bank cut rates on Tuesday for the sixth time in 7 months and urged lenders to follow suit to bolster growth. But analysts say risk-averse banks are unlikely to step up loans and will continue putting surplus cash in government securities.
Banks invested Rs356 billion ($7 billion) in government securities during Jan-March, and parked an average of Rs5 billion a day with the central bank’s reverse repo, representing a faster growth than their loan book, brokerage Motilal Oswal said.
Shares of State Bank are down 4% and those of ICICI have fallen 9% so far this year, compared with a 13.5% rise in the benchmark index and a 2.5% drop in the bank index over the same period.
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First Published: Fri, Apr 24 2009. 02 00 PM IST