Given the rising interest rates, slower investments and the domestic slowdown, loan growth, along with quality of assets, for banks is expected to be under pressure in the near term. This may be reflected in banks' performance for the quarter ending September. Not surprisingly, the Bombay Stock Exchange Bankex fell 15.4 per cent during the quarter, compared with a fall of 12.7 per cent in the Sensex.
Within the banking space, private sector banks are expected to beat their public sector peers, in terms of year-on-year growth in profit during the quarter. Considering the estimates for the top three public and private sector banks, private banks are expected to report at least a growth of at least 15 per cent in profit, while public sector banks are likely to witness subdued growth.
Manish Chowdhary and Aditya Narain of Citigroup, in a recent report on banks, said though they were cautious on the sector as a whole, they cite HDFC Bank as the most defensive. In the medium term, they were bullish on banks with stronger deposit franchises, such as Axis Bank, State Bank of India (SBI) and ICICI Bank.
For the September quarter, analysts believe HDFC Bank would continue to deliver consistent performance, and may even be able to clock margin upticks. On the other hand, SBI is likely to see a subdued growth in its bottom line, along with weaker asset quality.
The aggregate loan growth for the banking sector is likely to stand at 20 per cent, thus driving growth in net interest income (NII). However, non-interest income growth is likely to be modest, primarily owing to lower third-party income and lower treasury gains. The impact of higher savings account interest rates would be offset by higher base rates for banks. Notably, most banks raised their lending rates in the quarter (by 50-75 basis points), and this could provide some cushioning to their net interest margins (NIMs). Some public sector banks may witness additional margin pressure, as they switch over to a computerised non-performing asset (NPA) recognition mechanism. Thus, on an aggregate, the impact on NIMs would be moderate, believe analysts.
Mounting asset quality pressures
Public sector banks could witness a sharp rise in NPAs. Part-migration to system-based NPA recognition would hit the asset quality of these banks. Deteriorating health of borrowers in sectors like infrastructure, microfinance institutions, power, textiles and agriculture could also add to banks' asset quality woes. Banks are also expected to see a rise in slippages from their restructured loan books. While this could lead to an increase in NPAs, it may also result in a rise in the restructured loans portfolio.
| SNEAK PEAK | ||||||
| In Rs crore | SBI | Bank of Baroda | PNB | ICICI Bank | HDFC Bank | Axis Bank |
| Net interest income | 9,937 | 2,329 | 3,234 | 2,481 | 2,915 | 1,779 |
| % change y-o-y | 22.5 | 14.3 | 8.7 | 12.6 | 15.4 | 10.2 |
| Total income | 13,773 | 3,028 | 4,180 | 4,210 | 4,202 | 2,968 |
| % change y-o-y | 13.6 | 11.3 | 13.1 | 11.3 | 20.5 | 12.1 |
| NIM (%) | 3.63 | 2.7 | 3.68 | 2.55 | 4.4 | 3.21 |
| Bps change y-o-y | 23 | -30 | -42 | -6 | 20 | -50 |
| Bps change q-o-q | – | -20 | -10 | -10 | 20 | -10 |
| Net profit | 2,522 | 1,087 | 1,221 | 1,422 | 1,206 | 907 |
| % change y-o-y | 0.8 | 6.6 | 13.6 | 15 | 32.2 | 23.4 |
| All figures are average estimates for the quarter ending September 30 Source: Analysts’ reports | ||||||
Rajeev Varma, research analyst at Bank of America Merrill Lynch, believes there could be 20-30 per cent downside for public sector banks such as Bank of Baroda and Union Bank of India. He expects NPAs to double under a 'base case' scenario. Private banks, on the contrary, are better placed, since they have improved their asset quality over the last two years.
Higher NPAs also means a rise in provisions of most of public sector banks, thus resulting in slower growth in post-provision net profit.
