Treasury gains, deposit growth expected to be lower.
Despite a rise in credit growth and lending rates, net interest margins (NIMs) of banks are expected to be flat or slightly lower than in the previous quarter. The reason: Banks’ dependence on costly funds – bulk deposits and certificates of deposits.
“There will be pressure on margins in the fourth quarter, when the impact of recent deposit rate increases sets in,” said Suresh Ganapathy, head of financial research at Macquarie Research.
According to data from the Reserve Bank of India (RBI), credit grew 23.7 per cent annually as on December 17, while deposit growth was only 14.7 per cent.
As far as asset quality is concerned, banks that offered teaser home loan schemes would need higher provisioning. In the second quarter review of the monetary policy, RBI increased provisioning on such loans to two per cent from 0.5 per cent.
While ICICI Bank has discontinued such loans, State Bank of India is still offering such a scheme, with certain modifications. Other than this, slippages are expected to be in line with the previous quarter.
ICICI Securities expects that the overall asset quality will not deteriorate.
Another aspect affecting banks’ earnings would be pension provisions. Public sector banks would see a rise in operating expenses as employees choose the second pension option.
Kotak Institutional Equities said overall profit growth was expected to be 14 per cent, with private banks growing 27 per cent and public sector ones nine per cent.
In its third quarter policy review last year, RBI had increased the cash reserve ratio by 75 basis points to control inflation and mop up excess liquidity, leaving policy rates unchanged. Inflation is still a concern as food prices remain sticky at higher levels, making a case for further tightening.
Another factor that may impact banks is the rise in yields on government bonds. While yields have risen in tandem with inflation, they are below the levels seen at the end of September 2010. Hence, banks would have to provide less for erosion in the value of bonds in the investment portfolio, said a chief financial officer of large public sector bank.
Increasing the pressure on earnings will be treasury gains, which are expected to be muted. Going forward, NIMs are expected to gradually decline. The liquidity situation is expected to improve with increase in government spending, lower government borrowings and open market operations by RBI.
