 "Rising provisions, treasury losses to pull down banks' quarterly profits")
Weak treasury income, rising asset quality pressures and margin contraction will be the key trends witnessed by the Banking industry for the quarter ended September 30, 2013. Consequently, net profit growth for leading private banks such as ICICI Bank, HDFC Bank and Axis Bank will see some moderation.
Analysts expect leading private banks' (ICICI Bank, HDFC Bank and Axis Bank) net profit to grow by 11.2% (Axis) to 27.4 (HDFC Bank)% (see table). In stark contrast, all three leading public sector banks - State Bank of India (SBI), Bank of Baroda (BoB) and Punjab National Bank (PNB) will see fall in net profit ranging between 8.8% (PNB) and 26.2% (BoB).
"Private banks, which have been holding on to earnings performance within their guided range and at better-than-expected levels, are likely to feel the pinch of current macro headwinds—pressure on NIMs, moderating credit growth guidance, lower fee income and modest treasury profits", says Nilesh Parikh, Banking analyst at Edelweiss Securities.
Net interest margins (NIMs) for most banks is likely to be under pressure given the higher wholesale rates and limit on repo borrowings. Wholesale funded banks such as Yes Bank, IndusInd Bank, ING Vysya, Oriental Bank of Commerce, Andhra Bank, Canara Bank, amongst others will have a relatively higher impact compared to their larger peers, believe analysts.
"NIMs for banks are likely to decline due to sluggish lending yields and sticky deposit rates arising from the tight liquidity environment", says Clyton Fernandes, Banking analyst at Anand Rathi Securities. The recent hike in base rates, though, will provide some cushion to the margin contraction.
Treasury losses and lower third-party distribution income is likely to keep non-interest income growth subdued for the quarter. Rising yields (up 100-150 basis points in the quarter) will lead to treasury losses for the banks.
Thus, provisions on investments could also witness an increase in this quarter. But for RBI relief for banks (such as measures such as transfer of investments to hold till maturity and spreading mark-to-market losses over three quarters); the treasury losses could have been even higher, believe analysts.
Asset quality pressures are likely to stay elevated with private banks, too, witnessing pressure in their commercial vehicle portfolios. Public sector banks could continue to report higher slippages and restructuring.
"We expect credit costs to increase 40% for private banks (3% for public banks) as we expect gradual deterioration from low levels reported in the past. Slippages would be broadly in line with the previous quarter for public banks but fresh restructuring is expected to remain high", says M.B. Mahesh, Banking analyst at Kotak Institutional Equities.
Driven by strong 18% credit growth of the industry, private banks' average net interest income (NII) growth will remain strong at 20.3%. On the other hand, public sector banks could post muted NII growth at 6.5%.
Analysts expect leading private banks' (ICICI Bank, HDFC Bank and Axis Bank) net profit to grow by 11.2% (Axis) to 27.4 (HDFC Bank)% (see table). In stark contrast, all three leading public sector banks - State Bank of India (SBI), Bank of Baroda (BoB) and Punjab National Bank (PNB) will see fall in net profit ranging between 8.8% (PNB) and 26.2% (BoB).
"Private banks, which have been holding on to earnings performance within their guided range and at better-than-expected levels, are likely to feel the pinch of current macro headwinds—pressure on NIMs, moderating credit growth guidance, lower fee income and modest treasury profits", says Nilesh Parikh, Banking analyst at Edelweiss Securities.
Net interest margins (NIMs) for most banks is likely to be under pressure given the higher wholesale rates and limit on repo borrowings. Wholesale funded banks such as Yes Bank, IndusInd Bank, ING Vysya, Oriental Bank of Commerce, Andhra Bank, Canara Bank, amongst others will have a relatively higher impact compared to their larger peers, believe analysts.
"NIMs for banks are likely to decline due to sluggish lending yields and sticky deposit rates arising from the tight liquidity environment", says Clyton Fernandes, Banking analyst at Anand Rathi Securities. The recent hike in base rates, though, will provide some cushion to the margin contraction.
Treasury losses and lower third-party distribution income is likely to keep non-interest income growth subdued for the quarter. Rising yields (up 100-150 basis points in the quarter) will lead to treasury losses for the banks.
Thus, provisions on investments could also witness an increase in this quarter. But for RBI relief for banks (such as measures such as transfer of investments to hold till maturity and spreading mark-to-market losses over three quarters); the treasury losses could have been even higher, believe analysts.
Asset quality pressures are likely to stay elevated with private banks, too, witnessing pressure in their commercial vehicle portfolios. Public sector banks could continue to report higher slippages and restructuring.
"We expect credit costs to increase 40% for private banks (3% for public banks) as we expect gradual deterioration from low levels reported in the past. Slippages would be broadly in line with the previous quarter for public banks but fresh restructuring is expected to remain high", says M.B. Mahesh, Banking analyst at Kotak Institutional Equities.
Driven by strong 18% credit growth of the industry, private banks' average net interest income (NII) growth will remain strong at 20.3%. On the other hand, public sector banks could post muted NII growth at 6.5%.