The advantage of easing yields may be offset by lower interest income and rising bad loans.
Banks have heaved a sigh of relief on easing of bond yields at the close of financial year 2009-10. While the burden of making provisions for erosion in the bond portfolio will be less now, profitability will come under pressure due to subdued growth in interest income and increase in non-performing assets (NPAs).
The fourth quarter (Q4) saw a distinct improvement in credit pick-up. This is in keeping with the economic turnaround. But, this will provide limited benefit in the form of an improvement in interest income.
Lenders’ core business improved with the credit growth rate rising to 16.1 per cent (year-on-year as on March 12).
Krishnan ASV, a banking analyst with Ambit Capital, said most banks were expected to report subdued growth. Their core interest income growth is likely to be sluggish in January-March. Non-interest income, including earnings, will also remain muted. Interest spread could contract by 10-15 basis points in the quarter over the third quarter ended December 2009. Two broking entities — Angel Broking and Sharekhan — expect improvement in margins in the fourth quarter. Sharekhan, in its preview of listed banking sector stocks, said, “We expect net interest margins (NIMs) to improve by 5-15 basis points sequentially, driven by an improving credit-deposit (CD) ratio, due to a strong 5-7 per cent sequential loan growth as well as a residual downward re-pricing of deposits.”
Motilal Oswal Securities said the lag impact of repricing of deposits at lower rates, strong current account, savings account (Casa) growth and improving CD ratio would lead to a 5-10 basis points expansion in margins.
The Sharehkan report noted treasury gains would remain muted. The bond market saw firm yields and lesser volatility owing to the spike in inflation, fears of a rate hike and concern over the government’s borrowing programme.
Consequently, the yield curve has shifted upwards and is less steep since the third quarter of 2009-10. With yields moving northwards, most banks are likely to see lower treasury gains during the quarter. Moreover, public sector banks may have to take a hit on their investment portfolio due to marked-to-market (MTM) provisioning, which could adversely affect their bottom lines.
According to Motilal Oswal, losses on account of MTM will be limited despite a 15 basis points rise in yield on the 10-year government bond. MTM provisions on the available-for-sale portfolio will be limited, as a large part of it comprises liquid mutual funds and treasury bills.
Besides concern over MTM provisioning, slippages in advances, especially restructured accounts, remain a weak spot. The Reserve Bank of India had allowed banks to restructure loans of viable units which were facing temporary liquidity problems due to the economic downturn.
Although concerns over asset quality were receding, slippages from restructured portfolios remained important metrics to monitor in the fourth quarter, said Angel Broking.
