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Home  » Business » Muted growth likely for banks

Muted growth likely for banks

By Somasroy Chakraborty
January 08, 2014 10:10 IST
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Asset quality erosion, fresh loan restructuring and unprovided mark-to-market losses (revaluing assets at current prices) are again expected to muffle the growth in quarterly profit, notes Somasroy Chakraborty

A bankBanks’ earnings growth in the October-December period is likely to be limited despite improving liquidity, ebbing cost pressures and steady loan growth offering some respite to lenders in an uncertain macroeconomic environment.

Asset quality erosion, fresh loan restructuring and unprovided mark-to-market losses (revaluing assets at current prices) are again expected to muffle the growth in quarterly profit.

For several quarters, private sector banks, especially the new ones, have outshone their state-run rivals in earnings.

Sector analysts say this trend will continue in the third quarter of 2013-14.

"We expect earnings divergence among our coverage banking stocks to continue. . .

"Given the current state of yields, the unprovided MTM losses are likely to require meaningful provisioning for some public sector banks.

"No provisioning (is required) for new private banks on this count, as they have already provided fully," Vaibhav Agrawal, vice-president, research (banking) at Angel Broking, wrote in a note to clients.

Flat margins, low fee income

The Reserve Bank of India (RBI)'s exceptional liquidity tightening measures were normalised during the quarter.

This, coupled with the strong inflow of foreign currency non-resident (bank) deposits, led to an improvement in liquidity and eased the short-term borrowing cost for banks.

However, analysts believe this will not immediately translate into margin expansion and the full benefit of lower cost of funds will be visible only from the fourth quarter.

While three-month certificates of deposit and commercial paper rates fell around 100 basis points from the levels at the end of September 2013, these were still higher then the pre-tightening

levels.

Also, most banks have not pared their peak retail term deposit rates in three months and only a few have increased their lending rates.

Hence, most analysts expect banks' margins to remain stable, sequentially.

The growth in banks' non-interest income is also expected to remain slow in October-December as earnings from fees and commissions have decelerated in recent months.

"Fee income growth is expected to be muted. Banks have already seen growth in liabilities-related and third-party product-related fees.

(Hence) incremental fee income growth is expected to remain tepid," Saikiran Pulavarthi, banking analyst with Espirito Santo Securities, said.

While analysts expect slippages to moderate in the third quarter, credit quality stress is likely to stay elevated.

Private sector banks have not been spared from asset quality pressure but analysts say these lenders have performed reasonably better than the state-run ones on loan recoveries.

Sale of bad loans to asset reconstruction companies has also seen a pick-up, as most banks now appear determined to improve their credit quality.

Analysts estimate banks put assets worth Rs 4,000 crore (Rs 40 billion) for sale to ARCs in the October-December period.

The recoveries from written-off accounts could prevent a sharp erosion in banks' profitability during the quarter, they said.

Referrals for corporate debt restructuring in the third quarter was estimated to be Rs 29,000 crore (Rs 290 billion), compared with Rs 25,000 crore (Rs 250 billion) in the previous three months.

"However, in the last two months, proposals were only Rs 6,000 crore (Rs 60 billion).

“Though the trend is encouraging, we prefer to wait and watch, as this could be on account of RBI clamping on banks for higher restructuring," Alpesh Mehta and Sohail Halai, analysts with Motilal Oswal Securities, wrote in their research note.

Analysts caution that moderation in economic growth, high inflation, delay in monetary easing and stretched balance sheets of some companies remain key risks.

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Somasroy Chakraborty in Kolkata
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