Banks are expected to continue their strong run on the results front in the second quarter as well but rising costs due to higher interest on deposits.
MUMBAI: Banks are expected to continue their strong run on the results front in the second quarter as well but rising costs due to higher interest on deposits and a slowdown in credit growth are likely to take away the sting from the results.
Pathik Gandotra, Nilesh Parikh and Neha Agrawal of broking house SSKI, in a report, said, the rate hikes of April will jack up loan yields but this will be offset as credit growth has slowed down even as deposit growth soared.
Manish Agarwalla, banking analyst, Religare Securities, said net interest income growth during the second quarter will remain in line with credit growth, at around 24-26%.
“Margins will remain stable and rising fee and commission income will improve operating profit by around 30%,” Agarwalla said in a report on Monday.
Banks hiked their prime lending three times at the later part of the last financial year on the back of interest rate hikes by the Reserve Bank of India (RBI).
The RBI has raised its key rates nine times since October 2004 to slow inflation. Since December, it also raised the cash reserve ratiofour times to 7% to mop up funds.
But banks have not been able to cash in on the higher rates as credit growth has slowed to 23% from as high 32% last year.
RBI’s clampdown on liquidity has meant that banks have also been forced to look at garnering deposits paying a much higher rate than before, impacting margins. Banks were paying as high as 10% rates on normal retail deposits, though they have come off recently.
“The numbers will be good. But I expect profits to rise by at most 10 basis points. Operating costs and credit growth will have an impact. Also, some banks which had high exposure in the retail side are shifting their portfolio mix from retail to corporate,” said Sarika Purohit, banking analyst with Angel Broking.
Banks like ICICI, SBI, Union Bank and PNB have high exposure in the retail lending space, which has seen a significant slowdown due to higher interest rates.
However, banks may do well in some other areas like fee income and treasury income. “Aided by declining bond yields, banks have recorded strong treasury profits. Fee income growth continues to be robust for the banking system with benefits of CBS (core banking solutions) starting to accrue,” the SSKI analysts said.
Banking margins will also be benefitted because of treasury gains as international interest rates are moving south wards after the recent US Federal Reserve rate cut.
Another positive factor is the falling rates on wholesale deposits, particularly for banks with a large exposure to wholesale deposits like ICICI, Centurion Bank, IDBI Bank and OBC. Wholesale funding rates in India have declined by around 300 basis points since March 2007, which has led to a significant improvement in its incremental spreads.
On the negative side especially for public sector banks, is the challenge to garner more current and savings account deposits. Some PSU banks are facing serious pressure to maintain or improve on their existing CASA as higher FD rates have enticed customers to move money away from low return deposits. Among private banks ICICI Bank is also facing such pressure.
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