Banking: Earnings preview

India’s third largest private sector bank after ICICI and HDFC Bank reported its Q2FY11 figures on Thursday. The bank has posted a net profit of Rs 7,351.40 million for the quarter ended September 30, 2010, up 38%, compared with Rs 5,316.40 million a year ago. Total Income increased 18.50% to Rs 46,574.90 million from Rs 39,259.40 million a year earlier.

If the results of Axis Bank are anything to go by, the banking sector is set to report a good July-Sep 2010 quarter. HDFC Bank is slated to announce its results on October 19 and ICICI Bank on October 29, 2010.

Market expectations

Sequentially the performance for banks is expected to remain muted but when compared with the corresponding period of previous years, analysts expect a solid performance. On broad parameters, the street expects NII (net interest income) to grow by 33% YoY. However, net revenue growth could be relatively lower at 22% YoY due to muted trading gains and lower fee income growth.

Margin pressure, unless they pass on the cost  

A stable margin over QoQ is expected as hikes in deposit and short-term wholesale rates would be mitigated by the increase in base rates. On a YoY basis, margins would improve for banks, particularly PSUs, partly on account of the low base in Q2FY10, translating into strong 33% NII growth for Q2FY11. So, while banks will have to pay more to attract deposits, a significant pressure on NIMs is not expected as pricing power returns to the system in H2 with higher credit off take.

Delinquencies to remain high for some banks; expected to improve in H2

Some banks (particularly PSUs) could report higher slippages in Q2FY11, as witnessed in Q1. Moreover, higher bond yields could lead to MTM losses (or contribute less to overall profitability as in the case of Axis Bank) on the investment portfolio of some players. Axis bank generated Rs 108 crore of trading profits during Q2FY11, compared with Rs 224 crore in Q2FY10, a decline of 52% YoY. The share of trading profits to operating revenue also decreased from 10% in Q2FY10 to 4% in Q2FY11. So, while asset quality could be under pressure in Q2FY11, the outlook would improve from H2FY11 as slippages peak out and recoveries/ upgrades improve.


Scarce Resources, endless means

On the whole, at this juncture, banks are having a tough time dealing with resource mobilization. The banks are scrambling for resources, as is evident from the recent deposit rate hike, in dealing with credit growth which has just started to pick up. Though on a sequential basis credit growth for July-September quarter may not look impressive, on YoY basis credit growth is expected to be strong at 20% due to telecom disbursals. The gap between credit deposit growth, which was widening, has begin to shrink in the recent past. Pick-up in deposit growth in Q2 because of banks hiking deposit rates has also led to a fall in Loan-Deposit Ratio from 73.4% at end-Q1 to approx 72%.

Banks hike rates, live to loan the other day  

The new benchmarking of loans through – base rate, which replaced BPLR in July 2010, has also been upped by quite a few banks, except for the notable exception of State Bank of India, so as to match the deposit rates and to have some breathing space as borrowing costs eat into their NIMs. Public sector banks like, Allahabad bank and Punjab National Bank as well as private sector banks like Kotak Mahindra and Axis Bank are some of the banks that have raised base rates. Those banks who have not hiked are expected to jump the bandwagon once the festive season is over. 

Bankers rush to raise resources

Pressure to meet credit growth and that too in the wake of enhanced stringent prudential norms has led the banks to tap equity and debt market. Shoring up capital is certainly good for banks but not for the investors and especially from the valuation perspective in the short-term.

If we were to look at the industry classification of capital raised through public and rights issue (2010-11, till August), Banks and FIs top the amount and no of issues raised with a total of Rs 3,051 crore as against Rs 3,138 crore in entire 2009-10 (SEBI October Bulletin). This Rs 3,051 crore figure does not include the recent Rs 1,000 crore bond issue by SBI.

The only unlisted public sector bank – Punjab and Sindh Bank will also tap the primary market soon.

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