The CNX Bank Nifty Index has slumped 1.3% since January despite two rate cuts by the central bank, underperforming the broader market, which has gained by 3% in the same period. Investors appear worried about possible cuts in earnings estimates in the backdrop of weak credit growth. The gauge had done well in 2014, gaining 43% on a hope rally and expectations of a swift revival of the economy.

Most indicators such as rural consumption, investment activity and core sector growth are showing the recovery is fragile and is crimping demand for loans. Since demand is low, banks have been holding on to lending rates to protect margins. For the fortnight to 20 March, advances growth was below 10%, while deposit growth was also subdued at around 11.4%.

The gradual pace of revival has led to analysts scaling down earnings estimates for banks in 2015-16 as the recovery in growth and improvement in asset quality may be delayed. “There is a very high possibility that earnings growth for the sector will be cut to 12-13% from 15-16% for the current fiscal because of weak loan growth and higher credit costs," said an analyst from a foreign brokerage firm who declined to be named.

Also, March-quarter results may have little to cheer about. Earnings growth is expected to be in line with the weak guidance, while bad loans are expected to rise over the three months to December, Nomura Global Markets Research said in a note dated 31 March.

Low loan growth is a constraining factor and is likely to affect net interest income and fee growth. Nomura Research expects a pre-provision operating profit growth of 18% and a profit-after-tax growth of 13% year-on-year for private banks and a flat growth of around 0.8% in pre-provision operating profit for public sector banks. Net interest margins may remain stable as banks have delayed their base rate cuts.

Overall stressed assets as a percentage of loans could be plateauing at 13.5-14% for the year ending March, helped by several regulatory changes such as conversion of debt to equity, extension of loans to longer maturity and refinancing of loans. But analysts do not expect a sharp reduction in stressed assets unless the economic recovery turns stronger.

On public sector banks, there is not much progress visible on reforms such as financial and operational autonomy and the roadmap for bank recapitalization. If the Reserve Bank of India cuts rates on Tuesday, bank stocks will rally in the near term, but the upside may be capped in the longer run unless loan demand recovers.

My Reads Logout