Rate hike to dent banks' Q4 earnings

The Reserve Bank of India's efforts to squeeze out excess liquidity in the economy through a hike in short-term interest rates are likely to impact the quarterly earnings of banks.

"We believe the business environment is getting tougher for banks. Margins are under pressure with deposit costs rising by more than 100 basis points in the current quarter and we believe that growth is likely to slow down in the first half of FY08," brokerage firm Edelweiss Capital's banking analyst Vishal Goyal said in the latest quarterly preview.

With the results season set to kick off this week, analysts say that demand-led credit growth is not completely price inelastic.

Ahead of its annual monetary policy scheduled on April 24, the RBI took bankers by surprise with the move to hike the repo rate and the cash reserve ratio to 7.75 per cent and 6.5 per cent.

The decisions would suck out about Rs 15,500 crore from the system, while helping temper the huge demand for loans, particularly in the housing sector.

"The recent CRR hike would further put pressure on liquidity. Managing the cost of funds and maintaining net interest margins amid intense competition is a challenge for all the banks," another brokerage, IL&FS, said in a report.

Goyal does not expect interest rates to come down and believes RBI would consider inflation, external flows and credit growth before taking a pause on tightening measures.

According to Edelweiss Capital, private banks are expected to maintain their growth momentum, posting 42 per cent growth in operating profit, a jump of 36 per cent in revenues and close to 40 per cent growth in profits.

IL&FS estimates that HDFC Bank is likely to post 23.4 per cent growth in revenues and a jump of 30 per cent in profit after tax on the back of high business growth and continuing operating performance.

Besides the country's largest private lender, ICICI Bank, is expected to post 47 per cent Y-o-Y growth in profits and 39 per cent growth in revenues driven by its stake sale in the NSE for about Rs 500 crore, Goyal said, adding that the burgeoning growth of credit, notwithstanding the impact, would still remain on profitability owing to pressure on thinning margins.

Interestingly, state-owned banks are expected to lag behind private lenders with lower growth in earnings, industry analysts believe. The expected revenue and profits of the PSU banks are expected to grow only at 6 per cent and 46 per cent respectively.

Analysts expect the largest lender, State Bank of India, to post a growth of 80.6 per cent Y-o-Y in net profit. Credit growth is expected to be around 25 per cent with stable margins, while net sales are likely to increase only 2.8 per cent.

The Punjab National Bank is likely to post a profit growth of 32 per cent y-o-y and revenue growth of 43 per cent, while the Oriental Bank of Commerce could witness a loss of about 22 per cent in net profit and a marginal gain of 4.8 per cent in net sales owing to pressure on continuing margins and marked-to-market depreciation.

Other PSU banks such as "" Allahabad Bank, Indian Overseas Bank are also expected to post losses in their profits for the fourth quarter of the fiscal.

Edelweiss feels that the best of asset quality is long gone and incrementally negative surprise has higher probability going forward for the banking sector.

While credit growth remained robust during the last quarter, growing at about 30 per cent Y-o-Y, the jump in deposits which have grown by more than 22 per cent throughout this quarter driven by attractive rates, contributes to the major mop-up helping banks meet the credit demand despite a tight liquidity environment.

IL&FS added that the strong credit growth has been driven by retail, home mortgage loans as well as corporate credit off-take.

Lenders in the non-banking space like IDFC and SREI, however, are expected to post strong revenue growth at around 44 per cent and 27 per cent on year-on-year parameters.

Interestingly, the picture doesn't seem to be rosy for the NBFCs as revenue growth would be of close to 29 per cent. Profits too are also likely to record a growth of 15 per cent on year-on-year basis.

HDFC and LIC Housing are likely to post lower growth number for disbursements while profit are estimated to grow six per cent for HDFC and 61 per cent for LIC Y-o-Y.