Outlook is sombre for Indian banks

Credit growth to remain muted and net interest margins to be under pressure

Banks’ earnings growth for the first quarter  of 2015-16 (April-June) are expected to remain tepid, brokerage houses and analysts have predicted. Treasury income that had been a cushion for banks’ earnings in the last three to four quarters would not be able to shield the earnings growth in the first quarter due to the rising bond yields.

The Reserve Bank of India reduced the repo rate by 25 basis points on June 2 after which bond yields have risen by about 22 bps, thus impacting the treasury income of the banks.

In the April-June period, bond yields rose by 30 bps.

With credit growth continuing to remain in single digits and deposits also growing at a slower pace, it is believed to be another weak quarter. An HDFC Securities report said it expected banks to report a decline in net profit by 11 per cent in the quarter as compared to a three per cent year-on-year decline in the January-March one.

By RBI data, bank credit grew 9.75 per cent per cent in the year till June 12. Deposits grew 11.7 per cent. “Weak credit growth to continue to keep pressure on NII (net interest income) growth, especially for public sector banks,” said a report by Philip Capital.

“NIMs (net interest margins) will be affected by base rate cuts and treasury profit potential was also lower,” said a report by Nomura, especially for PSBs.

The NIM is the difference between interest earned on loans and that paid on deposits, considered a key measure of profitability.

Several banks have reduced their base rate by 15-30 basis points in recent months.

Though they'd started reducing their deposit rates some time before they started reducing their lending rates, the impact is likely to be minimal, say experts.

“Reduction in term deposit rates across maturities in earlier quarters will provide some cushion to falling NIMs. Within PSBs, except for Punjab National Bank (marginal quarterly improvement expected), all other PSBs are likely to witness a five to 10 bps decline (over a quarter),” said the HDFC Securities report.

Other income from banks is also expected to grow at a slower pace.

“We expect contribution from non-interest income to turn weak after a strong contribution over the past three quarters, primarily on account of weak performance from the treasury business.

"The other issues on non-interest income would continue, as we don’t see an immediate recovery in fee income, exchange income or recovery from written-off loans,” said a report by Kotak Institutional Equities.

Analysts don’t expect things to improve much on asset quality, especially for PSBs.

The HDFC Securities report said gross non-performing assets for PSBs should be rising to 5.1 per cent of the total versus 4.8 per cent earlier, on a quarter-on-quarter basis.

For private banks, GNPAs are expected to increase to 2.6 per cent from 2.45 per cent over a quarter.

“Given the continued sluggishness in macros, restructuring forbearance behind and rising slippages from the restructured book, most banks are extremely cautious on asset quality, especially for large-ticket exposures.

"Further, our interactions with various bank managements suggest slippages within mid-corporates (including small and medium enterprises) will remain at elevated levels,”  added the report.

Image: Reserve Bank of India; Photograph: Reuters