Top lender State Bank of India will likely be alone among major Indian banks to post a fall in profit for the June quarter, on slower credit growth and higher provisions, but margins for most banks may shrink on higher deposit rates.

Private banks led by No. 2 ICICI are forecast to outperform their state peers in the June quarter and analysts, who have mostly neutral or underweight ratings on the sector, said they may consider lifting their view if June quarter results meet or beat expectations.

"Next one or two quarters are going to be challenging," said Ravi Gopalakrishnan, chief investment officer at Pramerica Asset Management, which holds stakes in all the major private lenders.

"I'm not going to be too pessimistic. We will be carefully watching this quarter (to see) if net interest margins are holding up and whether there is any pressure on lending growth."

Strong economic growth, rising consumer confidence and the launch of attractive products have helped lift demand for loans in India, where a growing middle-class uses bank credit to buy homes and cars and pay for education.

However, a series of interest rate hikes to tame stubborn inflation is slowing loan growth and hurting asset quality, especially at state banks with heavy exposure to smaller commercial borrowers.

Credit at Indian banks grew at 3.7 per cent in the three months ended June compared with 5 percent in the same period a year ago, while deposits grew faster, at 5.5 per cent.

Net interest margins could slip 15-20 basis points after banks raised term deposit rates in the past two quarters, prompting customers to shift from savings account, said brokerage Sharekhan, which has a neutral view on the sector.

Pain For Public Banks

State banks have lost 10-20 per cent of their value so far this year while shares in private lenders HDFC Bank, Yes Bank and IndusInd Bank rose 4-8 per cent.

The BSE index is down about a tenth this year.

Bank of India, UCO Bank, Corporation Bank and Andhra Bank may post falls in profits in the June quarter while private lenders HDFC Bank, Axis and Yes could see increases of 20-30 per cent, a Reuters poll showed.

ICICI Bank, expected to post nearly 40 per cent profit growth in the June quarter, was the top pick of most brokerages.

Amongst public sector banks, "some could see further asset quality deterioration and higher-than-expected margin pressure," Nomura wrote in a pre-earnings note.

"The issue with public sector banks is largely with NPAs which will take about a quarter or more to get sorted," said Pramerica's Gopalakrishnan.

Public sector banks face higher provisioning costs and deteriorating asset quality under new rules that require them to be more stringent in recognising non-performing assets (NPAs).

The RBI has made it mandatory for Indian banks to gradually reach a provision cover ratio of 70 per cent, eroding profitability of those with lower coverage levels.

Last quarter, SBI posted an unexpected plunge in profit after its total provisions jumped 82 per cent, while taxes nearly doubled and staff-related expenses such as wages and pension liability also rose.

In the June quarter, SBI is widely expected to post a nearly 40 per cent drop in net profit.

"By the middle of this year, we would have said goodbye to the asset quality issues, at least for the period pertaining to 2008/09," said Arun Khurana, equity fund manager at UTI Banking Sector Fund, which owns stakes in India's four biggest banks.

"Oil prices have also come off so these are good signs. I'm extremely positive on banks for the long-term. There's a robust opportunity to make phenomenal amount of money," he said.

Leave Your Comment(s)