Bank profits to be under pressure in next 6 months

6 Nov 2009, 0104 hrs IST, Karan Sehgal & Pallavi Mulay, ET Bureau

The profitability of Indian banks is expected to be under pressure over the next two quarters. The possibility of lower treasury gains and muted growth in net interest income (NII) is expected to curtail the growth of banking sector.

The top 10 Indian banks made more than Rs 6,000 crore collectively from treasury operations in the first half of FY10 (Apr-Mar) against only Rs 220 crore in the corresponding period of the previous fiscal. This was possible because bond yields were declining and bond prices were moving up. However, a further softening of yields is unlikely.

“RBI’s latest quarterly review of monetary policy indicates that we are at the bottom of a soft interest-rate regime. Thus, high treasury income earned in the first-half from government Securities’ (G-sec) portfolio may not recur in coming quarters,” said Ravi Mehta, research analyst, Indsec Securities & Finance. The central bank restored the statutory liquidity ratio (SLR) to 25% from 24%, in a bid to reduce the liquidity in the banking system and send out a signal that a further softening of rates is ruled out.

Interestingly, banks have piled up investments in G-secs. The aggregate G-sec investment of Indian banks increased by 42% as on October 2009 from the year-ago level. If interest rates were to rise, banks would have to incur mark-to-market losses. “Public sector banks have high exposure to low-yield high-duration G-secs. They are more exposed to market risk than their private sector counterparts,” said Vaibhav Agrawal, AV-P, banking, Angel Broking.

While treasury income is expected to decline, banks can derive solace from a likelihood of better growth in non-food credit growth in the second-half of the current fiscal. Non-food credit offtake of the banking sector grew by a mere 11% year-on-year in the first week of October, the lowest growth observed in almost a decade. However, experts feel that the worst is over.

“If the GDP is forecast to grow at 6-6.2% during FY10, a 15-16% growth in non-food credit cannot be ruled out,” says Indranil Pan, chief economist with Kotak Mahindra Bank. According to Mr Pan, since real activity is gaining momentum, metal and infrastructure companies will be major borrowers of bank funds.

Siddhartha Sanyal, chief economist of Edelweiss Securities, echoes similar views. Many factors influencing demand for and supply of credit have turned positive now, he maintains. The demand for funds is likely to go up as working capital investment increases on account of a pick-up in industrial production and rising commodity prices. However, there is a catch here too.

Banks had mobilised high-cost deposits in the second-half of the previous fiscal, leading to a contraction of their net interest margin (NIM), the difference between interest earned and paid. Bankers say going forward NIMs will improve on a retirement of high-cost funds and mobilisation of low-cost deposits. However, that improvement will only be on quarter-on-quarter basis.

On a y-o-y basis, spreads in December 2009 quarter will still be less than the corresponding period of the previous fiscal. Therefore, despite a pick- up in credit offtake, banks will find it difficult to grow NII as high-cost deposits will still have a lag effect. This will lead to muted NII growth, which, coupled with low treasury gains, hints that banks will see a dip in their net profit in the second half of the fiscal.

VIA:E.T