Banks set to report modest growth in interest income

Amid signs of a slowdown, banks are likely to post a moderate growth in interest income due to modest credit off-take and pressure on net interest margins (NIM), led by rising interest costs in the quarter ended June.

Analysts and bank executives said the increase in provisioning for the slippages (loans turning into non performing assets) and erosion in bond prices would weigh on the bottom lines in the quarter.

The first quarter being a lean season, the credit growth was low till mid-June. However, with the high interest rate on term deposits, banks had seen better accretion of resources till June 17.

 

Domestic brokerage firm Sharekhan, in a research note, said net interest incomes (NIIs) of banks are expected to remain flat on a sequential basis. Public sector banks are likely to report a decline of 1.2 per cent in NIIs on a quarter-on-quarter basis. Private banks are expected to report a marginal quarterly growth of one per cent in their NIIs.

Another domestic brokerage, ICICI Securities, said incremental credit disbursements till mid-June was just Rs 62,862 crore, while the accretion of deposits was robust at Rs 1,39,998 crore. Moreover, a higher savings rate, at four per cent, would hit NIMs this quarter, leading to a dip of 10-15 basis points.

Admitting pressure on margins, K R Kamath, chairman and managing director, Punjab National Bank, said the growth in savings bank deposits had declined, since the money was now moving from savings bank deposits to term deposits.

Though banks have increased lending rates, the lag effect of rise in funding costs would impact margins. Revati Kasture, head of research, CARE, said margins would be under pressure, as banks had not been able to fully pass on the rise in deposits costs to borrowers.

Besides the growth trend in assets (loans) and liabilities, the impact of rising bond yields on bank investment books has a bearing on net profits, and the quality of assets would have a bearing on net profits.

With Reserve Bank of India (RBI) still in the monetary tightening mode, the yields on bonds have hardened across maturities during the first quarter. RBI raised key policy rates twice in the quarter. The yield on 10-year government bond was 8.38 per cent in the end of June, up from 7.98 per cent in the end of March.

ICICI Securities said marked-to-market provisions may remain high for the available-for-sale investment portfolio. State Bank of India and Oriental Bank of Commerce may feel the heat due to the scenario.

There may not be fresh addition in non-performing assets (NPAs) after a sharp up-tick seen in 2010-11. This may result in lower incremental provisions on fresh slippages. However, the new norms for sub-standard assets and restructured loans may raise the provisions slightly.

With a switch-over to system-generated data on NPAs, the outstanding NPAs of public sector banks may rise. S C Kalia, executive director, Union Bank of India, said the addition to NPAs for Union Bank of India is likely to be more in the first quarter than that in the last quarter of 2010-11.