Dwindling demand for loans, shrinking margins and higher provisioning requirements are likely to drag the earnings of banks in the coming quarters, industry analysts said, giving more credence to concerns of a slowdown.
The credit expansion of banks moderated in the current financial year, as borrowers prefer to wait in the wake of rising interest costs. Indian banks have increased their lending rates by up to 200 basis points since the beginning of the year. Banks lent Rs 42,000 crore so far this financial year—only a third of their total advances in the first three months of 2010-11.
This country's largest lender, State Bank of India (SBI), decided to trim its annual credit growth target to 16-19 per cent from earlier target of 19-22 per cent. Rating agency Icra said credit growth of Indian banks this financial year may fall short of the Reserve Bank of India's (RBI) target of 19 per cent.
Analysts fear a slow rate of growth, coupled with narrowing margins, would also drag the net interest income (NII) growth of state-run lenders till the end of the next financial year. “We expect prolonged deceleration in NII growth till 2012-13. We expect NII growth to decelerate to 10.9 per cent for public sector banks in 2011-12 and remain modest at 13.4 per cent in 2012-13,” said Kashyap Jhaveri and Pradeep Agrawal, analysts, Emkay Global Financial Services. NIIs have been key growth drivers for bank earnings between 2008-09 and 2010-11, expanding at a compounded annual rate of 28 per cent.
The pressure on net interest margins are also expected to intensify after the recent rounds of deposit rate increases. “We expect the margins of banks to remain under pressure,” said Rahul Jain and Vishal Modi, analysts, HDFC Securities. For private banks, the margin squeeze is likely to be more acute, considering the impact of priority sector lending in fourth quarter, they said.
Provisions of banks are also set to rise, owing to pension liabilities and fresh slippages in loan portfolios. “The gross non-performing asset percentage could increase to 2.3-2.7 per cent as on March 31 2012 from 2.3 per cent in the year-ago period. If interest rates continue to rise, they could negatively impact asset quality,” said Karthik Srinivasan, senior vice-president, Icra.
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While non-performing loans in the commercial real estate sector increased by 70 basis points to 2.3 per cent in the last one year, the priority sector loan portfolio also saw a sharp decline. “We maintain our near-term cautious stance on the sector,” said Macquarie analysts Suresh Ganapathy and Mudit Painuly.
Angel Broking said it the earnings of large private sector banks are expected to be better, owing to lower provisioning needs. “If inflation and interest rates continue to stay high even in the second half, credit growth would slow down to 16-18 per cent and the quality of assets of public sector banks may be hit,” said Vaibhav Agrawal, vice-president (research), Angel Broking.