Mid-cap Indian banks reported strong profits for October-December on Friday, riding on robust loan growth and increased corporate activity, but rising interest rates could weigh on margins going forward.
State-run lenders PNB, Corporation Bank, Bank of India and Punjab & Sind Bank all posted higher profits, while private-sector Dhanlaxmi Bank reported a more-than-5-fold jump in profit.
However, many bank officals, including those at Punjab National Bank, Corporation Bank and Bank of India said net interest margins (NIM) could face pressure with rising deposits.
"Deposit rates are going up, deposit cost is going up. Pressure (on margins) will be there, but not immediately. We will see pressure from the June quarter," said B.A. Prabhakar, executive director at Bank of India.
Indian banks are required to hold at least 24% of their deposits in government securities. The central bank had raised its key lending rate by 150 basis points in six moves in 2010 to combat inflation. Bond yields move inversely to prices.
A Reuters poll on Wednesday showed analysts expect India's central bank to further raise key rates by 25 basis points next Tuesday to cool accelerating inflation pressures, hurting treasury income in banks.
Though Punjab National Bank's net interest margin was at a strong 4.13% for the December quarter, Chairman KR Kamath said current margin levels may not be sustainable and the bank sees a "strong upward bias" on interest rates.
However, banks with strong current and savings accounts (CASA) ratio would be offset the impact of higher deposit costs, analysts said.
"In the coming quarters, we do see pressure for those banks which have less than 35% CASA... they may see some amount of NIM compression," said Vaibhav Agrawal, an analyst with Angel Broking.
Of the mid-cap banks, Agarwal said he preferred Dena Bank, Jammu & Kashmir Bank, United Bank of India and Syndicate Bank for their "reasonbly good CASA franchies" and cheap valutions.
These banks were trading at 0.8-0.9 times of their FY12 book value, he added.
STRONG LOAN BOOK
Bank officials said they expect liquidity pressures in the banking system to continue unless the Indian central bank stepped in.
"There is liquidity pressure that can be seen by the reverse repo rates...There is going to be pressure on liquidity," Kamath told reporters, echoing the views of other bankers who posted quarterly results on Friday.
Reverse repo rate is the rate at which the central bank absorbs liquidity. During July-December, the Reserve Bank of India has raised reverse repo rates by 150 basis points. However, banks expect credit growth to be robust for the rest of fiscal year 2011, despite liquidity pressures.
Demand for loans in Asia's third-largest economy, which the International Monetary Fund has forecast would expand 9.7% in 2010, is expected to remain strong in the coming quarters.
Bank credit in India increased 24.4% on year as of Dec. 31, according to the central bank's data. Deposits were up 16.5% from a year earlier.
Most banks including Punjab & Sind Bank, Corporation Bank, Yes Bank and Bank of India expect credit growth of over 22% in FY11.
In Oct-Dec, the BSE banking index fell 4.6% compared to a 2% rise in the benchmark BSE index.
However, following robust earnings, the bank index rose 0.77% on Friday, while the 30-share BSE index shed 0.2%.