Two of the top three private sector lenders – HDFC Bank and Axis Bank – who reported their results this week, have shown a better-than-expected growth in lending and profits, setting the right tone for performance of other private banks which derive a big chunk of business from retail lending.

By shifting the mix towards retail growth, the banks are positioning towards a declining rate environment. Commercial vehicles, gold loans, credit cards and the other category were key growth drivers in the retail loan book for the early birds to declare results for the second quarter ended September 30.

HDFC Bank said that the growth in advances was driven by higher disbursement of retail loans, as corporate credit demand continued to remain weak. The loan ratio of retail and wholesale segments was 53:47.

For Axis Bank, the main business segments driving fee growth during the quarter were retail banking, which grew 43 per cent, and large and mid-corporate banking, which grew 15 per cent.

However, public sector banks are expected to report marginally lower loan growth, compared to that of private banks, which could see growth driven by personal loans and mortgages, said an analyst report by HDFC Securities.

A research note by Barclays estimated that the net interest income and other income of PSU banks to be muted for Q2 FY13.

“Non-interest (other) income will likely be muted as loan sanction activity remains subdued. Weakness in loan processing fees should be partly offset by recoveries from written-off accounts at Punjab National Bank, Bank of Baroda and Bank of India,” added Barclays.

Most banks have been bumping up their ‘other income’ through investments and treasuries to tide over the decline from loan processing fees. The trend is expected to continue in the current quarter as banks have waived processing fees during the festival season.

“Banks appear to be managing their cost bases; therefore, we expect costs to have grown more slowly than assets across the PSU banks. Despite cost controls, the pre-provisioning profit growth will likely have been slower than asset growth,” said Barclays.

Stress on asset quality continues to be elevated as the economy remains weak.

However, the nightmare of asset quality bogging down the operating profits of PSU banks does not seem to be the case for non-banking finance companies (NBFCs). Analysts tracking NBFCs expect strong interest income growth and stable margins for Q2 FY13. They believe that asset quality will be largely stable across sub-sectors, including the power sector.

Still, all might not be well in the power sector. “The asset quality outlook for power financing still remained tough in our view and it may not lead to significant NPA accretion for the quarter,’’ added Barclays.

In a research note, CRISIL has said that it expects moderation in business growth for NBFCs in the near term although their asset quality and profitability may be more resilient than those of the banks.

Regulatory and policy related issues, which have been an overhang for both asset financing and infrastructure financing NBFCs, are now over and gone apart from the guidelines of Usha Thorat Committee, which is yet to be finalised, according to HDFC Securities. The committee report spoke about the issues and concerns of the NBFCs on Tier I capital, liquidity ratio and provisioning norms.

Even the dark clouds over the infrastructure financing NBFCs seem to be clearing with the recent SEB debt recast plan cleared by the Cabinet, coupled with raising power prices across the board and partial resolution of coal issues, which are positives for the sector. Any reduction in the bulk borrowing rates will augur well for NBFCs, say analysts. However, the slowdown in investment climate may lead to flat credit growth for the industry on a sequential basis.

(Edited by Sanghamitra Mandal)

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