Banking: Margins may not expand

With loan growth tapering off to 13.2 per cent for the fortnight ended September 11, it’s unlikely that banks will be able to grow their assets by the estimated 20 per cent in the current year. The incremental loan-deposit ratio is currently less than 20 per cent and as such it could be difficult for banks to expand their net interest margins (nim) meaningfully even if most of the high cost deposits have been repriced.

The BSE Bankex has been a big outperformer over the last six months. For the nim to increase, credit growth needs to pick up substantially and while the second half of the year should see more action on this front, loan growth could, at best, hit 16-17 per cent. In a recent report, Citigroup noted that historically low loan-deposit ratios have seen nims trend downwards.

The brokerage points out that while earnings for the universe of banks it researches could grow by a fairly strong 24 per cent year-on year in the September 2009 quarter, the previous quarter which saw earnings grow at 56 per cent was probably the peak. In fact, pre-provisioning profits (adjusted for trading gains) are expected to rise by about 2.4 per cent compared with negative growth in the previous two quarters. Also, delinquencies may not yet have peaked with the result that loan loss charges are not expected to come off.

With the Reserve Bank of Australia having raised interest rates, the days of an accommodating monetary policy now appear to be coming to an end in India too. However, interest rates are unlikely to rise too sharply, say industry watchers pointing out that the revival in the economy should ensure that there are enough borrowers, both corporate and retail.

Nevertheless banks are not available cheap; Axis Bank trades at 2.7 times estimated 2009-10 price to book value (P/BV), while ICICI Bank trades at just under two times. State Bank of India trades at two times P/BV, while Union Bank trades at 1.4 times. However, although HDFC Bank is the most expensive of them all, trading at just under four times P/BV, it is the best in the business, thanks to its clean balance sheet and strong corporate franchise.