Banks Q3: No ugly surprise but margins under pressure

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Banks Q3: No ugly surprise but margins under pressure

The worst seems over for Indian banks. The third quarter (October-December) earnings, according to analysts tracking banks, would not spring any ugly surprise for them. However, the pressure on profitability would continue on the back of slowing down loan growth, asset quality concern and rising cost of funds.

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The worst seems over for Indian banks. The third quarter (October-December) earnings, according to analysts tracking banks, would not spring any ugly surprise for them.

However, the pressure on profitability would continue on the back of slowing down loan growth, asset quality concern and rising cost of funds. The growth in net interest income (NII) or the difference between interest paid and expended is expected to be subdued.

"The negatives have been broadly priced in the stock prices and the downside from here is limited," said a research report by Nirmal Bang.

"Asset quality pressures are likely to continue for banks with greater exposure to risky sectors like SME, real estate, textiles, aviation, steel, power, infrastructure and higher restructured loan book. The impact of slowdown has been clearly visible in the performance of the businesses as well as the stock prices of banks."

According to the latest Reserve Bank of India (RBI) data, the non-food credit that banks lend to companies and individuals dropped below 17% mark (RBI's projected growth in FY12) for the fortnight ending December 16, 2011. It grew at 16.8% year-on-year to Rs 41,84,077 crore.

"We expect banks to report relatively week operating trends as top line growth was likely challenging and credit costs headed higher. Our expectation for NII is predicated upon a slower loan growth coupled with lower NIM Y-o-Y (except SBI). NIM should stabilize sequentially and likely to improve going forward as fund costs decline," Nilanjan Karfa and Murali Gopal from Brics Securities said in a report.

Meanwhile, the third quarter would see less slippages unlike the previous quarter on account of intensified recovery efforts by the banks. Many lenders are now focusing on loan recoveries forming separate units for it. Banks saw higher non-performing assets due to the implementation of system driven process in the July-September quarter. The same lender would see some improvement on NPA front.

"Net slippages would improve QoQ for State-Owned Banks. We expect slippages to decline sequentially on a higher base for most Banks (as they have already transited their entire portfolio to system-based NPA recognition in 2QFY12). However, increasing stress in the economy may keep slippages at an elevated level," said a report by brokerage company Motilal Oswal.

                       Price on Q2FY12 results date     CMP     % correction
SBI                           1978                                1630       -17.6%
PNB                            998                                 766        -23.2%
Axis Bank                  1124                                794         -29.4%
HDFC Bank                 487                                 427        -12.3%
ICICI Bank                   945                                 696       -26.3%
Kotak                          478                                 421        -11.9%
Central Bank               102                                   65         -36.4%
Bank of Baroda            756                                 669         -11.5%
Union Bank                  231                                 173         -25.1%
Yes Bank                    285                                  232         -18.6%
Federal Bank               385                                  336         -12.6%
Indusind Bank             270                                  226         -16.3%
Bank of India                334                                  267         -19.9%

Source: BSE, Nirmal Bang Securities

saikat.das@network18online.com