Indian banks’ Q3 strong; rising rates a worry

Indian banks’ Q3 strong; rising rates a worry

Mumbai: Surging interest rates may weigh on the growth momentum of India’s top banks in 2011, after rising loan demand and fee income in Asia’s third-largest economy likely boosted their profits in the final quarter of 2010.

In the quarter, State Bank of India (SBI), the country’s top lender, and rivals ICICI Bank and HDFC Bank are also expected to have benefited from an improvement in asset quality on revival in business and consumer confidence.

India’s economy is growing at more than 8.5%, the fastest pace among major Asian economies after China, boosting demand for corporate and mortgage loans.

“There will be upward pressure on the interest rates in the short-term and that will have an impact on the credit growth," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services.

“In the medium to long term, the prospects of the sector still looks attractive on robust economic growth outlook."

A Reuters poll on Wednesday showed analysts expect India’s central bank to raise key rates by 25 basis points next Tuesday to cool accelerating inflation pressures.

The Reserve Bank of India (RBI) had raised its key lending rate by 150 basis points in six moves in 2010 to combat inflation.

Bank loans in India grew at an annual 24.4% at end-December, according to the central bank data, compared with 11.3% in 2009 and 16.7% at end-March in 2010.

The central bank sees non-food credit growth of banks at 20% in 2010/11, still below growth rates of above 30% in the pre-crisis period.

“We view that strong economic outlook and improved business confidence will lead to continued momentum in loan growth," brokerage Motilal Oswal said in a research note.

“So far, retail and SME loan growth is very strong, but with capex-related activities gathering pace, corporate loans would be the key growth driver," it said, referring to the small and medium enterprises.

Rising demand for financial products from India’s growing middle-class and increasing mergers and stock floats are expected to boost fee incomes for the banks in the December quarter, analysts said.

State Bank’s Rights Issue

However, analysts said net interest margins, a key gauge of profitability, of banks such as ICICI and HDFC Bank may see a marginal decline in the quarter ended December from the July-September period due to a hike in deposit rates.

The 10-yr benchmark bond yield rose 6 basis points in the quarter, which would hit treasury income for banks that are required to hold at least 24% of their deposits in government securities. Bond yields move inversely to prices.

At State Bank, which with associates controls a quarter of Indian bank loans and deposits, focus will be on its loan growth target in the near term, overseas expansion plans and details of its planned 20,000 crore ($4.4 billion) rights issue.

State Bank’s profit growth in the December quarter is expected to be slower than its private sector rivals due to higher provisions against bad loans to comply with the central bank guidelines.

The RBI has made it mandatory for Indian banks to gradually reach a provision cover ratio of 70%.

Shares of SBI, which the market values at more than $35 billion, rose nearly 24 % in 2010 and HDFC Bank gained 38%. ICICI had risen 31%, while the main market had climbed 17%.