Boom time

After remaining sluggish, Bankex has gone through the roof

Since the Sensex low on June 14, the BSE Bankex has been the best performing sectoral index, having gained over 50 per cent.

The fear of interest rates going higher and the gloom of a global slowdown had resulted in the banking sector languishing till the last week of July. However, since then, the BSE Bankex has gone through the roof.

Stock prices as leading indicators suggest that the financial performance of the sector should improve substantially in the September 2006 quarter, which is being corroborated by banking analysts. In their estimates on the sector's financial performance, analysts are expecting banks to post strong growth.

There are several reasons: First, at the global level, despite the recent ECB rate hike, the interest rate environment seems benign as the US Federal Reserve has indicated that it is likely to stop raising rates.

Crude oil and other commodity prices are also on a decline, which will tame inflation. Back home, with the GDP up 8.9 per cent y-o-y suggests that the growth story is intact.

Non-food credit growth was at 33 per cent in the current financial year till September 15, and NPAs have continued to decline. Though deposit rates have gone up, lending rates too have gone up twice in the past two quarters.

Thus, analysts are expecting net interest margins to improve or at least remain at the same levels as in the last quarter. In their treasury operations, banks will benefit from falling yields.

In the September quarter, the yield on the ten-year benchmark was down to around 7.6 per cent from over 8.1 per cent in June. This should result in banks writing back previous provisions and improved profitability.

The fall in yield is expected to help public sector banks more than private sector banks. SBI is expected to see a 10-15 per cent y-o-y increase in its net interest income, while private sector banks like HDFC Bank and ICICI Bank could see a net income and operating profit growth of over 40 per cent.

Analysts believe that the worst is over for banks and going forward, and are prepared to see loan growth slowing down from 30 per cent to around 20 per cent over the next few quarters. If interest rates decline in the future, banks will post better profits on account of their securities portfolio.

However, bank stocks, which have gone up a lot, may pause for some time.