Fee income, good returns may keep banks afloat

TTM EPS

  PE As on

Net 
Profit% chgMar 07Apr 07PEG* ICICI Bank825.14.534.824.91.1 Bank of Baroda245.717.728.18.40.4 Bank of India447.475.923.08.30.1 HDFC Bank343.630.535.728.71.0 IDBI213.56.18.79.70.8 Indian Overseas289.841.718.56.30.2 UCO Bank30.9

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4.06.10.1 Oriental Bank 54.9-73.225.67.72.0  A rise in lending rates, an increase in risk weights and provisioning requirements would suppress credit growth for banks, said the report. Banks' credit to some segments such as commercial real estate, retail and loans to non-banking financial companies, which witnessed very high growth, are likely to slow down, resulting in an overall decline in credit growth. Banks with higher exposure to retail, agriculture and SME sectors would have comparatively higher yield on advances.  Banks will have lesser resources, with deposit growth expected to slow down to close to 19 per cent from over 24 per cent at the end of March 2007.  With mutual funds continuing to give attractive returns and increase in insurance premium, deposits growth for banks would be in a range of 16-18 per cent.  The growth in deposits in 2006-07 came mainly from term deposits. Demand deposits and term deposits grew by 16 per cent and 24.5 per cent compared with 27.5 per cent and 16.4 per cent, respectively, a year ago, said the report.  A lower growth in demand deposits resulted in a decline in banks' CASA share to 16.3 per cent from 17.3 per cent at the end of March 2006.  Upward pressures on interest rate, the RBI policy of monetary withdrawal and expansion in loan book have resulted in a stagnant investment portfolio. Any incremental growth would primarily be to meet SLR (statutory liquidity ratio) requirements. Banks' SLR portfolio would be in the range of 25-29 per cent.  An incremental decline in investment-deposit ratio (I-D ratio) has resulted in an incremental addition to credit-deposit ratio (C-D ratio) till March 2007.  For most of the banks, I-D ratio would be in the range of 28-30 per cent and C-D ratio around 75 per cent. Banks with relatively lesser leverage on the book and favourable asset-liability position would be comfortable on the margin front, said the report.  Operating expenses are expected to be contained due to high natural attrition and implementation of core banking solution.  A relatively high tier-I capital and a higher difference between tier-I and tier-II capitals represent comfortable capital adequacy. Banks would raise tier-II capital in FY08 and FY09 to meet Basel-II norms. Banks may raise tier-I capital up to 15 per cent of the previous year-end net worth, according to Karvy Stock Broking.