Banks see modest-to-low Q3 profit on slow loan rise

Mid-cap banks are expected to post modest-to-lower profits on year-on-year basis in the Oct-Dec quarter on slow loan growth and low treasury gains, analysts said.

Indian bank loans in the third quarter rose in single digits at 9.7%, the lowest in more than a decade, from an average 30% rise in 2008, Reserve Bank of India (RBI) data showed.

This would result in muted net interest income, Ananda Bhowmick, analyst at Fitch Ratings said.

Also, "higher treasury yields will result in lower return on assets," he added.

he yield on the benchmark 10-year government paper rose about 50 basis points in October-December as expectations of policy tightening by the central bank gained momentum after inflation shot up in November.

Rising food prices fuelled wholesale price index inflation to a 10-month high of 4.78% in November.

The third quarter is likely to be relatively modest in terms of treasury performance, compared to the huge profits registered in the first and second quarters, but rise in yields was not enough to trigger large mark-to-market losses, Angel Broking''s Vaibhav Agarwal said in a report.

Broking house Motilal Oswal expects a 10-15 basis point net interest margin improvement on a sequential basis for most banks due to falling cost of funds.

"Net interest margins will widen on repricing of deposits," Fitch's Bhowmick said.

The third quarter will also see a rise in provisions by some banks to meet the RBI mandate on loan-loss coverage, analysts said.

Banks that had a provision coverage ratio of less than 70% would have to make more provisions from the third quarter onwards. The central banks has asked banks to have 70% coverage by September 2010.

State-run banks which would have to increase their provision coverage are Bank of India, Indian Overseas Bank and Dena Bank.

Slippage from restructured loans is the key factor to watch for Bank of India, analysts said.

A Reuters poll of brokerages saw Union Bank of India posting a 34.21% fall in net profit to Rs4.4 billion and Indian Overseas Bank clocking 47.49% fall to Rs2.03 billion, while Allahabad Bank's net profit will fall 49.23% to Rs1.8 billion.

Though yields are expected to further harden in the current quarter, analysts say it would be more than offset by higher credit growth and lower bad loans.

In the past couple of fortnights, credit has showed signs of picking up while deposit growth has moderated due to improvement in capital markets and unattractive returns, analysts added.