Bank earnings to ride on rebound in loan demand

Bank earnings to ride on rebound in loan demand

Mumbai: Leading Indian banks are expected to mostly report robust quarterly earnings growth on the back of a pick-up in loan demand, and a fast expanding economy should boost their outlook.

State Bank of India, the country’s largest lender, and rivals ICICI Bank and HDFC Bank are seeing an improvement in asset quality, as strong economic and corporate growth reduces the pace of loan defaults.

“Credit growth is picking up and that’s a positive trigger for the banks," said Srividya Rajesh, a fund manager at Sundaram BNP Paribas Asset Management, which manages $3 billion in assets including shares of State Bank, ICICI and HDFC Bank.

“Better credit growth should also improve the margins and asset quality of the banks in the coming quarters." Bank credit in India grew an annual 17.05% in early April, according to the Reserve Bank of India’s (RBI) provisional data, in tune with a rise in business and consumer confidence, from a low 9.7% in October and compared with 16.7% at end-March.

Analysts expect loan demand to pick up further in the first half of 2010-11 that started on 1 April as industries will need more funds to expand operations in an economy forecast to grow more than 8% in this fiscal year.

The central bank sees non-food credit growth of commercial banks at 20% in 2010-11, still a far cry from growth rates of above 30% in the pre-crisis period.

Although the central bank raised policy rates by a quarter-point for the second month in a row on Tuesday, commercial banks are unlikely to increase their lending rates in the near term because of large deposits lying idle.

Brokerage Motilal Oswal said in a report this month it expected banks’ core operating performance to continue improving in 2010-11, driven by higher loan growth and margins, strong fee income growth and abating concerns on asset quality.

There are some challenges, though.

Bad loans are likely to rise less rapidly with the economy picking up, but a central bank directive to raise the provisioning to 70% by September, from 10% previously, will check the profit growth.

And a hardening interest rate regime will have squeezed treasury income from trading in bonds in the March quarter, mainly for State Bank that dominates the sector.

Banks in India are required to hold at least 25% of their deposits in government securities and a rise in yields lowers the value of bonds in their books. The 10-yr benchmark bond yields rose 17 basis points in the March quarter.

Shares of ICICI and HDFC are up 8% and 14%, respectively, this year, while State Bank, which the market values at $30 billion, is down 2%. The main market up about half a percentage point so far in 2010.