The loan rangers

Asset growth continues to be strong and banks have managed to protect their margins in a rising interest rate scenario.

Going by the numbers, the December 2006 quarter, part of what is called the busy season,seems to have kept bankers on their toes. There was no let up in the demand for money and loan books bulged. But with liquidity scarce, many banks had to scrounge around for funds. At the end of the day they've done well for themselves.

There were no surprises at HDFC Bank : it grew its net profit a predictable 32 per cent y-o-y. The smaller UTI Bank managed a smart 40 per cent and despite its size, ICICI Bank turned in a stunning 42 per cent rise in its bottomline. 

INTERESTING TIMES
	Net Interest Income		Net Interest Margin (%)		Operating Income
	Q3FY07	Q3FY06	Q3FY07	Q3FY06	Q3FY07	Q3FY06
HDFC Bank	928.00	670.00	4	3.9	696.9	517.6
ICICI Bank	1709.00	1296.00	2.6	2.4	1976	1194
SBI	3951.00	2965.00	3.27	2.84	2855	1126
UTI Bank	415.00	287.00	3	2.87	358.6	256
Rs crore

If the 5 per cent fall in State Bank of India's (SBI) net profit is very disappointing, that number doesn't really tell the whole story. A glance at the results posted by a clutch of banks shows that they seem to be coasting along.

Thanks to strong asset growth and better fees, net interest margins (NIM) do not seem to have felt the pressure in a quarter when interest rates played truant.The only concern: deteriorating asset quality. 

BUSINESS AS USUAL
	Deposits		Advances
	Q3FY07	Q3FY06	Q3FY07	Q3FY06
HDFC Bank	66,749	51,250	53898	42,538
ICICI Bank	1,96,892	1,33,881	172763	1,22,612
SBI	4,04,352	3,63,731	315376	2,48,598
UTI Bank	50,920	34025	32337	19531
Rs crore

With both consumers and corporates hungry for loans, banks were not about to say no. But, they are becoming choosy. HDFC Bank's taking a breather""asset growth moderated to 35 per cent in the quarter.

Loan growth at ICICI bank continued to decelerate, especially for the retail portfolio, at a 42 per cent y-o-y rise though, in customer assets, it's still remarkable given high base.

But, clearly the bank is going easy on home loans: they still account for half the retail book, but home disbursals rose just 11 per cent y-o-y. At HDFC Bank, the retail loan book actually remained flat over the quarter.

UTI Bank too seems to prefer lending to companies at this point in time even though it's retail portfolio is just 27 per cent of the loan book, which grew a furious 66 per cent this quarter, albeit on a low base.

Analysts believe the trend could hold for some time. At SBI too, lending to the corporate sector appears to have taken precedence this quarter.

Fees continue to come in at a lively pace: at HDFC Bank they grew at 33 per cent with derivatives making a good contribution. At ICICI Bank too, they rose a smart 53 per cent y-o-y coming mainly from the retail segment. For UTI Bank too, it was the retail franchise space that brought in most of the fees.

Despite banks having had to pay more for deposits, their net interest margins have remained intact or even grown. Indeed in a difficult funding environment, margins at HDFC Bank remained stable at around four per cent. With deposit growth moderating to 30 per cent y-o-y in the quarter, the bank did well to mop more current and savings accounts (CASA)""they bounced back to 55 per cent of total deposits-- thereby alleviating cost pressures.

It was a similar story at UTI Bank' where a better deposit mix helped it regain margins to 3 per cent, after a weak start to the year.Quick to increase deposit rates, ICICI Bank managed a strong 47 per cent rise in deposits and even a small expansion in the NIM

While SBI still lags the market in terms of deposit growth, the bank's portfolio of deposits looked better in the December quarter. That's how it managed the rise of 33 per cent in its net interest income of 33 per cent , though it must be mentioned that this comes off a very low base.

As does the improvement in the margin. After maintaining a relatively low profile in the deposits market, SBI has become rather aggressive of late. That, analysts believe, could lead to SBI's margins remaining volatile, given the fairly dynamic asset-liability pricing environment.

The other concern that industry watchers have is deteriorating asset quality. Retail Non Performing Loans (NPLs) for ICICI Bank now constitute 68 per cent of aggregate net NPLs. It's not just the quality of retail loans that's worrying.

UTI Bank, for instance, has large exposures to sectors such as finance, real estate, textiles and chemicals. While these sectors have turned in relatively high yields and the losses too have been low, they are also traditionally more vulnerable to market reversals.

Also UTI Bank has built up a large retail book in a relatively short span of time: about a quarter of this is unsecured and can be challenging to handle. Asset deterioration over the quarter has been modest at SBI, but needs closer watching. As does the banking sector's relatively heated growth in a rising rate environment.