Pressure from restructured loans to continue; higher trading profits possible.
Robust growth in loans and improved margins is expected to help profitability of the banking sector for the quarter ended June 30, analysts said.
The growth in advances in the first quarter was around 20 per cent, though mainly due to payment for 3G telecom spectrum auction, a one-time event. However, analysts said a pick-up in industrial activity will help sustain loan growth.
| LOOKING BACK | ||||
| Bank | Net interest income# | Reported net profit | ||
| Rs crore | % Chg* | Rs crore | % Chg* | |
| SBI | 6,721.44 | 38.82 | 1,866.60 | -31.93 |
| PNB | 2,497.95 | 40.29 | 1,135.03 | 31.13 |
| HDFC Bank | 2,351.36 | 26.96 | 836.62 | 32.61 |
| ICICI Bank | 2,034.94 | -4.86 | 1,005.57 | 35.20 |
| Bank of Baroda | 1,744.95 | 18.64 | 906.28 | 20.41 |
| *YOY growth in % #Interest Earned - Interest Exp Data source: Capitaline Compiled by BS Research Bureau | ||||
Loans grew at a faster pace in the June quarter; it was 17.3 per cent in the previous one. Banks are expected to post strong growth in net interest income, also helped by the lower base.
According to Motilal Oswal, an over 40 per cent growth in net interest income (NII) is likley to be posted by Andhra Bank, Bank of Baroda, Oriental Bank of Commerce and Union Bank of India. It also says ICICI Bank is likely to post a decline in NII.
Deposit growth, however, slowed during the quarter, as rates continued to be unattractive and most banks were yet to raise deposit rates significantly. Lower deposit growth, coupled with high credit growth, pushed the incremental credit deposit (CD) ratio to 99.4 per cent by the end of the quarter; it was 75.4 per cent at the beginning of the period under review. For the entire quarter, the CD ratio was 72.1 per cent.
With loan sanctions remaining steady, most banks are expected to show increase in fee-based income, analysts said. “The recent pick-up seen in the home loan and auto loan segment augurs well for the banks to garner processing fees, apart from other non-fund- based fee income sources,” said a Prabhudas Lilladher report.
Also Read
Net interest margins
Net interest margins (NIMs) of the banks, though expected to increase sequentially due to lower base, may dip sequentially, since they have begun making interest payout on savings bank deposits from April 1.
Relatively benign earning yields and rise in cost of deposits may also impact margins on a quarter-on-quarter basis. According to some analysts, NIMs are likely to decline by 10-15 basis points for most banks, on a sequential basis.
Asset quality
Pressure on asset quality is expected to continue, especially for public sector banks, which have a higher proportion of assets that are restructured. Around 3.8 per cent of the loan portfolio of banking sector assets has been restructured. About 4.3 per cent of public sector banks’ assets are restructured, compared to 1.8 per cent of those in private sector banks.
“Though the overall economic environment has improved substantially, we believe some restructuring on the corporate side is likely to continue. Moreover, the loans restructured in Q1FY10 would complete their moratorium period and, hence, the performance of this portfolio will remain a key monitorable,” said Prabhudas Lilladher.
Among large banks, State Bank of India (SBI) and ICICI Bank are likely to make higher provisions to comply with the regulatory norm of 70 per cent provision coverage ratio. Though the Reserve Bank of India (RBI) has extended the deadline for ICICI Bank to comply with the provision coverage norms, SBI is also likely to make an appeal for deadline extension. RBI has mandated provision cover of 70 per cent by September.
Trading profit
Trading profit can turn out to be a dark horse, especially for banks active in treasury management, as relatively higher volatility was observed in market yields during the first quarter.
Yields have declined by 25-30 basis points of the 10-year government security, but increased 25 bps on 1-year gilts and by five bps on 2-year gilts, due to the drying of liquidity.
“As yields have declined quarter-on-quarter for longer tenors and yield volatility has been higher (75 bp change in minimum and maximum rates in 10-year G-secs) during the quarter, we expect higher trading profits quarter-on-quarter,” said Motilal Oswal.