Banks may have a subdued third quarter 2011-12, according to analysts and bankers, with the growing burden of bad loans, restructured assets and provisions for debt portfolio.
The moderation in credit growth due to the economic slowdown and rise in funding costs would impact net interest income and fee-based income.
According to Reserve Bank of India data, the annual pace of credit expansion declined to 17.1 per cent in December 2011 from 23.9 per cent a year ago.
Nirmal Bang Securities, in a preview of the banking sector results, said the impact of the slowdown has been visible in the performances of the businesses. The stock prices of banks have already discounted the expectation of higher slippages in the quarter.
Asset quality pressures are likely to continue for banks with greater exposure to risky sectors such as small and medium enterprises, real estate, textiles, aviation, steel, power, infrastructure and higher restructured loan books.
Revati Kasture, head research with CARE, said, “Economic slowdown will increase defaults, leading to more non-performing loans and restructured assets. Both will increase provisions, putting pressure on profitability.”
State Bank of India managing director Krishna Kumar said, “The peak of NPA additions is behind us.”
The provisioning burden will grow over the same period last year. This is so as RBI has increased provisioning requirement for NPAs from 2011-12 and slippages as corporate balance sheets have been hit by high interest rate and slowdown.
The fall in credit growth and increase in costs of deposits may be a drag on margins. Brokerage firm Batliwala & Karani said in its report margins are likely to report pressure due to rise in funding costs. Moreover, large part of lending rate hike is already over. However, some banks may defy the trend
SBI chairman Pratip Chaudhuri has said that the bank expects to report net interest margin of 3.75 for the third quarter. A sharp revision in loan rate in the last few quarters has brought benefits in the form of better interest income.
The volatile movement in bonds in the quarter is another factor affecting provisions. The sharp rise in yields at the close of the second quarter had put pressure on bank bottom line.
Kasture of CARE said while yields did harden at the close of the third quarter, bank would need to make incremental provisions. These amounts are not expected to be heavy enough to drown profitability.
Most banks have already booked mark-to-market losses on bond yields to upwards of 8.5 per cent for Q2 of 2011-12. Hence, they are expected to report only marginal mark-to-market losses in Q3 results, said Angel Broking in its report on the banking sector.
