3 reasons why banks' earnings in Q1 will disappoint

The market is not counting on banks in the April-June quarter as net interest margin (NIM), the main barometer to determine banks’ health is expected to record a contraction to the tune of 10-20 basis points. The reason is three-pronged: higher interest rate, muted credit growth and new provisioning norms.

July 07, 2011 / 15:37 IST

Saikat Das
moneycontrol.com

The market is not counting on banks in the April-June quarter as net interest margin (NIM), the main barometer to determine banks' health, is expected to record a contraction to the tune of 10-20 basis points. The reason is three-pronged: higher interest rate, muted credit growth and new provisioning norms.

Private sector lenders like HDFC Bank and ICICI bank continue to find favours from analysts while public sector lenders viz Bank of Baroda and Punjab National Bank are expected to report better margins than other state-owned banks.

In its previous policy meet, the Reserve Bank of India had hiked its key rates by 75 bps. Consequently, banks across the board announced rate hikes, which then capped credit growth. This may exert margin pressure in the new quarter. A rise in savings deposit rate by 50 basis points to 4% would put additional pressure on NIM.

Meanwhile, higher provisioning norms (viz. 15% from 10% on sub-standard assets and 2% from 0.40% on standard assets of restructured accounts) as mandated by RBI, will have an impact. Higher interest rates in the on-going slack season (April to September) will resist credit growth further.