Slowing loan growth, rising bond yield may dampen bank profits

Slowing loan growth, rising bond yield may dampen bank profits

Mumbai: Indian commercial banks are likely to post a modest increase in fourth quarter net profit even as credit growth slowed and lending rates declined, analysts say. Axis Bank Ltd will announce its fourth quarter results on 20 April, kicking off the earnings season for the banking industry.

Mark-to-market, or MTM, losses on banks’ bond portfolios is also likely to contribute to muted profit growth. MTM is an accounting practice of valuing financial assets in line with their market value and not at cost.

Also See Glimmer of Hope (Graphic)

Bond yields rose in the January-March quarter and their prices dropped, diminishing the value of banks’ bond holdings, after the central bank cut interest rates. Bond yields and prices move in opposite direction.

For the fiscal year ended 31 March, loan growth in the Indian banking system dropped to a five-year low of 17.3%, against the central bank’s projection of 24%. Until the third quarter of the fiscal year, bank credit was growing at a rate of 25%.

India’s economy is estimated to have grown at the slowest rate in six years in the last fiscal. Companies and consumers are borrowing less and banks have become more selective about lending because of concerns about a potential increase in loan defaults.

“As loan demand disintegrated, banks started losing their pricing power with the larger, higher quality corporates (and they were averse to lending to the smaller ones)," said Macquarie Capital India Pvt Ltd analysts Seshadri Sen and Mudit Painuly in a 3 April research report. “As a result, benchmark prime lending rates (PLRs) for banks have collapsed over the quarter."

Public sector banks have lowered their PLRs, or the rate offered to their most creditworthy customers, by 100-150 basis points in the fourth quarter, to 11.5-12.5%. They have lowered deposit rates even more, by up to 150 basis points, across maturities. One basis point is one-hundredth of a percentage point.

The drop in deposit rates and cuts in the cash reserve ratio (CRR), or the portion of bank deposits kept with the central bank, will cushion banks to some extent against lower income from loans and slowing business growth, Sen and Painuly said. The CRR was cut to 5% from 9% in the second half of the fiscal by the Reserve Bank of India (RBI).

Profit growth for government-owned banks in January-March would be 15-16% year-on-year, but compared with the third quarter, profit would drop 23-24%, analysts Rajeev Varma and Veekesh Gandhi of DSP Merrill Lynch (India) Ltd wrote in an 8 April research report.

State Bank of India (SBI), the country’s largest lender, is expected to report profit growth of 14-15% in the fourth quarter from a year earlier, the same report said.

The bank’s profit growth would have been higher, but for the provisions that it will have to make for bad loans.

SBI’s net profit in the fourth quarter is expected to grow 20.45% from the year-ago period, according to the consensus estimate of analysts surveyed by Bloomberg.

ICICI Bank Ltd, India’s largest private sector lender, would register a sharp drop in net profit both year-on-year and quarter-on-quarter, according to the data. ICICI Bank’s net profit growth is expected to fall more than 36% quarter-on-quarter and 29% from a year earlier.

The DSP-Merrill Lynch report said ICICI Bank’s profit growth on a year-on-year basis is likely to decline more than 35% owing to “volume contraction, margin pressure, lower fees and higher credit costs".

ICICI Bank and Axis Bank, with a high share of bulk deposits, are most likely to benefit from the decline in interest rates, analysts say. But, unlike lending rate cuts, the benefits of lower deposit rates won’t kick in immediately because the lower rates are applicable only to new deposits.

According to Antique Stock Broking Ltd analyst Ravi Sankar, public sector banks will be the most affected by MTM losses because the bulk of the bonds that they have in their portfolios are of long maturity and susceptible to interest rate movements.

In contrast, private sector banks buy bonds of relatively shorter maturity and the yields on such bonds have not risen as sharply.

SBI will be the lender most affected by MTM losses and HDFC Bank Ltd the least, according to Sankar.

A key factor in the fourth quarter results for banks would be the large scale restructuring of stressed loans by banks. Public sector banks have restructured 2-5% of their advances and private banks 1% of their loans, said a research note by Kotak Institutional Equities, a division of Kotak Mahindra Bank Ltd.

Had the banks not been allowed by RBI to restructure stressed loans in the wake of the economic downturn, such loans would have been classified as non-performing, requiring banks to set aside money to cover the risk of default and crimping profits further.

Graphics by Sandeep Bhatnagar / Mint

Ashwin Ramarathinam contributed to this story.