Rise in lending rates, cost controls to drive banks' profits

The improvement in net interest income (NII) on account of rise in prime lending rates and control over cost of resources (deposits) will drive banks’ profit in the second quarter ended September, say analysts.

The treasury gains are likely to be muted due to a rise in provisions for dip in value of bonds after the system witnessed a rise in yields across maturities. Gains from the stock markets and foreign exchange operations were not sufficient to cover for losses on bonds, bankers and research analysts said. The fee income, which is linked to the pace of corporate credit offtake, is unlikely to show much increase for most banks.

On Monday, IndusInd Bank will kick-start the reporting of banks’ second quarter results. The lender posted 77 per cent increase in net interest income (NII) in the June quarter, with healthy net interest margin (NIM) of 3.3 per cent.

Motilal Oswal Securities said the margins would expand meaningfully from the second quarter of 2009-10 (at 2.9 per cent), leading to 34 per cent growth year-on-year in NII. On a sequential basis, margins are expected to be flat. Improvement in NII will be driven by higher loan growth and abating concerns about asset quality. Operating profit will grow at a lower rate of 23 per cent, as trading profits are expected to decline.

Operating expenses may increase, as public sector banks would take into account pension provisions and gratuity shortfalls, it said.

Axis Bank will announce its results on October 14. It reported a 44.77 per cent rise in NII and a net margin of 3.71 per cent in the June quarter.

On better contribution from core operations (lending business), a senior public sector executive said, though the credit growth had remained subdued, almost all banks raised benchmark lending rate in August by 25-50 basis points.

Despite the new base rate being introduced from July 1, most banks get a bulk of their interest income from loans under the BPLR (below prime lending rate) regime. So, the rate rise brought immediate benefits to banks.

Referring to a rise in provisions on hardening of bond yields, analysts said there was a rise of over 30 basis points in yield in the three-month period ended September.

The asset quality and provisions for bad loans have been under intense scrutiny after banks restructured assets of over Rs 1 lakh crore under Reserve Bank of India’s special dispensation.

With improvement in business sentiment and economic recovery, concerns over slippages are now less intense. Bankers expect provisioning to be lower than that in the first quarter.