Core earnings to drive banks' earnings

Banks are likely to continue with the trend of strong credit offtake and easing pressures on treasury operations when they declare financial results for the first quarter of the current financial year to March later this month, analysts said. Core business growth will dominate the April-June quarter results, they said.

"Core earnings will show a healthy trend in April-June," said Sejal Doshi, bank analyst with Angel Broking.

However, on a sequential basis, there may be a decline in growth rates as the first quarter traditionally is a lean period, analysts said.

"However, on a year-on-year basis, credit growth accelerated during the April-June quarter, while interest rates have not moved up much. So first quarter results should reflect these strengths," said a bank analyst with a domestic brokerage.

During April-June, credit portfolio of scheduled commercial banks (till June 10) expanded by around 27.2 per cent over the previous year. Incremental credit-deposit ratio continued to increase and stood at over 100 per cent during the year.

The rising growth in advances, however, has increased the pressure on banks to raise deposits at a faster clip. Till now, banks have been trimming their investment portfolio to fuel credit growth but that option is now being exhausted, analysts said.

"The first sign of pressure on banks to raise deposits should be visible in April-June (earnings)," said Manish Joshi, bank analyst with Sushil Finance. The key concern of interest rate risk during the previous quarters has, however, somewhat abated, analysts said.

The yield on the benchmark 10-year has increased by only around 20 basis points during the quarter. The movement of the yield on the 10-year benchmark spanned a range from around 6.8 per cent to 7.25 per cent -7.35 per cent.

"Some banks even booked profits when the yields dropped to 6.9 per cent levels," said a Mumbai-based bank analyst.

Coupled with the lower-than-expected increase in yields, banks also shifted securities from available-for-sale portfolio to held-to-maturity during April-June.

State Bank of India, Oriental Bank of Commerce, Vijaya Bank and Syndicate Bank are among the banks which availed of the interest rate hedge during the period.

According to a recent report by CLSA Asia Pacific Markets, banks' earnings are not going to be affected much due to interest rate increase, largely on account of improving asset quality and lower provisioning.

Overall, analysts believe private banks are better equipped to turn in strong earnings.

"Private banks are more efficient at increasing their fee-based income in line with the advances growth," said Joshi of Sushil Finance. Nevertheless, public sector banks look better on valuations, he said.

"We are more positive on state-owned banks""which have a higher potential for capital appreciation," a recent report of Cholamandalam Securities said.

"The amortisation of the voluntary retirement schemes got over last year. Further, these (state-owned) banks made wage and pension arrears last year. As a result, their staff costs are likely to be much less," Joshi said.

Joshi said in terms of valuation, State Bank of India and Punjab National Bank topped the list. Cholamandalam Securities' list also includes Union Bank and Corporation Bank in its list.

CLSA Asia Pacific said State Bank of India, ICICI Bank and Oriental Bank were the best investment options on the improving asset quality in the system.

HDFC Bank, UTI Bank and Punjab National Bank were also picked up as preferred exposures to the sector by CLSA.