Back in the race

Investors can expect banks to maintain margins.

After going through a painful correction thanks to the cash reserve ratio increase and repo rate hike in the end of last month, the BSE Bankex is once again at the same levels as they were before the hikes.

Analysts say most of the negative news is already factored into the price and banks should not have much difficulty maintaining margins going forward.

The credit growth continues at near 30 per cent levels, which is a positive. In order to contain inflation, the RBI has hiked the repo rate twice by 0.25 basis each in January and March during the last quarter.

It has also increased the cash reserve requirement during the quarter by 100 basis points, after a 50 basis point hike in Q3. The positive is that the RBI will pay interest on CRR balances from June 24, which will help improve profitability.

The impact of recent rate hikes has resulted in banks scrambling to raise deposits offering high rates. However, analysts say the impact of higher interest rates on deposits will start impacting a few quarters later.

As interest rates rise, banks will also take a hit in the valuation of their investment portfolios, which will affect public sector banks such as SBI, Bank of Baroda and PNB.

The RBI has also increased the provisioning requirement for retail loans such s credit cards and personal loans by 100 basis points to 2 per cent.

For the fourth quarter, analysts expect banks' net interest margins to improve over the previous quarter, mainly owing to higher lending rates and interest on cash balances with RBI.

Net interest income at public sector banks is expected to grow between 10 and 20 per cent for banks such as SBI, Bank of Baroda and PNB.

Private banks such as HDFC Bank and ICICI Bank, the operating profit could grow between 40 and 50 per cent. Going forward, loan growth is expected to slow down to 20-22 per cent, while deposit growth rate is already on an upturn thanks to attractive interest rates.

Banks such as HDFC Bank, SBI and PNB, which have a higher proportion of low cost deposits (current and savings accounts), will have a better cushion to margins.

The RBI has reduced the interest rate on CRR balances by 0.5 per cent, which will be a negative. However, with most public sector banks trading at 0.9-1.1 times their book value, the near-term negatives are already priced in.

Metals : Better realisations

Integrated steel players such as Tata Steel and SAIL are expected to benefit from steel prices realisations rising an estimated 12-14 per cent y-o-y in the March 2006 quarter, say analysts. Also, these companies are expected to benefit from easing input prices of coking coal on a y-o-y basis in the last quarter.

An improved environment has helped the BSE Metal Index rise 3.8 per cent during the past three months compared with 1.2 per cent fall in the Sensex.

Meanwhile, Tata Steel's saleable steel production rose an estimated 5-6 per cent y-o-y in Q4 FY07 and its realisations too are estimated to have grown 12-13 per cent y-o-y to Rs 36,000-37,000 per tonne levels in the last quarter, add analysts.

As a result, Tata Steel's net sales are expected to improve 12 per cent y-o-y in the last quarter, while a tight check on raw materials should help operating profits rise 52-53 per cent.