Credit slump, low margins to hit banks’ Q4 earnings

Profits Of Top Six Banks To Grow At 15% Y-o-Y

SLOWING credit growth and lower net interest margin are expected to have an impact on the earnings of banks in the past quarter of FY09. The net profit of top six Indian banks is expected to grow at an average rate of 14.6% year-on-year in March 2009 quarter compared to 50.8% in December 2008 quarter. Banking sector had successfully bucked the slowdown till December 2008 quarter. In many ways, a slowdown in banks is a further affirmation of an overall slowdown, as this is the sector which closely reflects the economy.
    The main reason behind analysts expecting low growth in March 2009 quarter is that the non-food credit has grown by 18.6% in March 2009 quarter vis-à-vis 23.7% in the previous quarter. With falling input prices, the working capital requirements of the companies too have come down, which has negatively impacted the credit growth. The outlook for the credit growth too is subdued as economy growth will take time to rebound.
    Banks have invested much more in government securities (g-sec) in March 2009 quarter than earlier. In fact, investment in g-sec is 4.5% more than what Statuary Liquidity Ratio (SLR) requirements stipulates. This was because the fear of non-performing assets (NPA) was looming large, and banks preferred to invest in safest asset. However, this strategy had its cost too, as the yield on g-sec average is around 6-7% much lower than the rate of returns on commercial loans.
    On a positive side, the analysts don't expect mark-tomarket (MTM) losses on g-sec portfolio to be significant. This is because the banks have systematically decreased the average maturity of such investments. And, the rates at short end of the curve moved up by lesser margin. The yield on a oneyear zero coupon g-sec actually fell by 226 bps as on March 31, 2009 compared to December 31, 2008, while that on a ten-year g-sec jumped by 110 bps.
    As per the new guidelines of Reserve Bank of India, loans, which were standard on September 1, 2008, can be considered for restructuring, while still being classified as standard loans. This will help the banks in delaying the recognition of an NPA. But, it also means that NPAs shown by banks in March 2009 quarter will not be a correct reflection of their asset quality.
    As per the average analyst estimates, HDFC Bank is expected to post a growth of 28.4% in its net profit. This is worth appreciating as the bank will be successfully maintaining its average growth despite the slowdown, if the estimates come out to be true. In PSU category, Punjab National Bank is expected to post a growth of 38.4% in net profit buoyed by high business growth. ICICI Bank is again expected to be the laggard, much the way it performed in the previous three quarters.
    There is an uncertainty surrounding the outlook of banks at present. This is because the yields on g-sec are hardening due to fears of heavy government borrowing, making it difficult for banks to make treasury profits. The credit growth is expected to be in the range of 15-17% in FY10. It seems that the growth in bank's profit will further slow down in the next few quarters.
    karan.sehgal@timesgroup.com