Mid-cap banks’ Q2 seen strong, but woes ahead

Mid-cap banks’ Q2 seen strong, but woes ahead

New Delhi: Mid-cap Indian banks are likely to post another strong quarter with substantial profit growth, but sluggish non-interest income in a rising rate environment will pressure the overall performance of the sector.

According to a Reuters poll of 24 brokerages, banks such as Oriental Bank of Commerce and YES Bank may post as much as 45% rise in net interest income, while only two banks IDBI Ltd and Indian Bank are seen posting a marginally lower profit.

“In this quarter, we expect good performance seen in the last two quarters to continue for mid-sized banks. They should see pretty substantial improvement in their net interest margins," Vaibhav Agrawal, an analyst with Angel Broking told Reuters.

He expects Oriental Bank of Commerce, Uco Bank, Corporation Bank, Dena Bank and YES Bank to post big rises in operating profit for the quarter ended September.

Most banks are likely to have witnessed stable credit growth during the quarter, but avoiding margin squeeze in a high-rate environment will be the biggest near-term challenge for mid-sized banks, analysts said.

“Credit growth has mostly come from the corporate sector. If IIP numbers we saw is a trend, then that might be a problem," said Divyanshi Dayanand, an analyst with Sushil Finance.

India’s annual industrial output growth dropped to single digit in August, raising doubts about the economy’s strength and the need for the central bank to increase rates again in November. High delinquencies; Stable margins

“We expect margins to remain stable quarter over quarter, as the impact of hikes in deposit and short-term wholesale rates would be mitigated by the increase in prime lending rates," Religare Capital said in a pre-earnings note.

Delinquencies are likely to remain high, but this might just be the peak for the sector, which is likely to see significant loan growth during the second half of the year.

However, with the benchmark yield moving upwards, Treasury profit may become close to zero for banks, HSBC Securities analysts wrote in a note.

Since bond prices are inversely proportional to yields, rising benchmark yields would mean banks have to make provisions for the trading losses made on their holdings of government stocks.

The benchmark 10-year bond yield rose 30 basis points in the September quarter, which was its biggest quarterly rise since the December quarter when it had risen 52 basis points.

“The impact will be felt more for PSUs (public sector utilities) versus private banks on a sequential basis," the brokerage said.

Newly restructured loans may, however, lead to higher provisioning for bad loans, particularly for the state-run ones, analysts said.

In case of a state-run bank like Bank of India, where amount of non-performing assets is still not very clear, and hence keeping provisioning in sync becomes a major issue, Sushil Finance’s Dayanand said.