Banking sector results for the quarter ended June have been in line with expectations as banks continue to make profits. However, analysts said these results could be the calm before the storm, as banks’ core interest income is likely to remain subdued and the threat of non-performing assets (NPAs) may rise in the rest of 2009-10.
Even in the just-concluded quarter, banks have earned more from non-core businesses as slower demand for credit, high deposit rates and cuts in lending rates shrunk their main interest income.
Net interest income (NII) increased an average 9.32% in April-June, 2009 for the top ten banks compared with a 54.55% rise in other income on a year-on-year basis.
For some banks, income earned through loans actually shrunk marginally.
For ICICI Bank, NII shrunk 5% to Rs 1,985 crore during the quarter, while it shrunk to Rs 802 crore (Rs 810 crore) for Union Bank. All the top ten banks showed a huge difference between interest income and other income, with the weakness in interest income being compensated by a huge rise in other income.
For example, State Bank of India’s interest income rose just 4.30% to Rs 5,025 crore; however, most of its profits came from a 48.46% rise in other income to Rs 3,569 crore.
Banks had also kept aside money in April-June last year because of a sharp fall in bond prices. Since bond prices have corrected this year, they could afford to write back that money. In other words, most of this money may not even have been earned this year and would possibly have been just accounting entries (just because bond prices turned up).
Analysts say there is a clear trend of banks depending more on write-backs than their core interest income. Suresh Ganapathy, banking analyst with Deutsche Bank, said core interest income for banks has been really weak and a reflection of how interest rates have moved in the quarter. “It’s more to do with the timing of loan-rate cuts and the fact that deposit rates were being priced with a lag. Bank margins have come off drastically as deposits have grown faster than credit,” he said.
Ganapathy points out that banks, especially those from the public sector, have been very active in cutting lending rates but have no control on deposit rates which have already been locked at a high rate. He predicts 2009-10 to be tricky as credit growth is unlikely to pick up much from the levels in 2008-09 because lending activity is subdued.
“Banks are expecting a 20-25% credit growth but I think it will be difficult because last year growth in the third quarter (October-December) was strong and the base effect will catch up this year. I expect loan growth to be 15-17%... and margins will be lower by at least 20 basis points this year,” he said.
Another threat for banks this year is the possibility of higher non performing loans. This threat is heightened especially after the RBI’s special amnesty to companies to repay their loans by June 30.
Bankers as well as the RBI have admitted that some loans may turn sour even after restructuring this year. Analysts say the provisioning is just not enough. Restructuring means banks giving borrowers time to pay back a loan. Banks may also lower interest rates to help borrowers pay back faster.
Analysts predict 1-3% of the restructured loans to come back and haunt banks this year. Ananda Bhoumik, banking analyst with Fitch, said possible increase in bad loans is a far bigger threat than lower interest income.
“That interest income will be weak was expected because credit growth is slow. A 10-15 basis points shrinkage in credit won’t be a problem. However, banks’ provisions, at an average 50-60% of their non performing assets, are low. Given that a part of the restructured loans are likely to turn into NPAs, banks will have to work on provisions,” he said.
Banks had provided for losses from falling bond prices in the first quarter of last year. Most of those provisions have been included in the banks’ income this year as bond prices have risen.
However, if bond prices fall again in July-September, these provisions may have to be remade, shrinking banking income at a time when credit growth is slow. Bhavesh Kanani, banking analyst with Sharekhan, said the second quarter will not be great for banks but also does not expect a significant contraction in margins.
“There will be some impact of the deposit cuts and wholesale rates may also be re-priced. But credit-deposit rate will still be down as banks may not be able to deploy their funds,” he said.
Kanani expects the second half of the year (October-March) to be better as all deposits get re-priced and credit picks up in line with the economy. “Already the core sector is showing some signs of revival and industrial production numbers in August will clarify the picture further. Second half of the year could be different from the first because if demand picks up, some banks like ICICI, which have chosen not to grow their advance book aggressively, may also come into the market,” he said.
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