Banks will be lending less and providing more for bad loans; the combination will result in a lower growth in profits in 2009-10.
Most banks turned in good numbers in the December 2008 quarter, with their investment portfolios getting a boost from falling bond yields. Moreover, they had lent fairly large amounts at attractive spreads. As a result, the net interest income for most banks was a minimum of 25 per cent going up to as much as 90 per cent and revenues from fees were fairly robust.
However, with the economy now clearly in a downturn, banks too will be robbed of some momentum. Merrill Lynch estimates that earnings growth for most banks could collapse to about 5 per cent compared with the 24 per cent expected in 2008-09.
Indeed, some of the pressure points are already visible. Non performing loans (npls), have, on average, risen by about 15-20 per cent sequentially. Over the past five years, banks have been cleaning up their balance sheets and had reduced the share of non-performing loans (npls). Gross npls as a share of loans were just about 2.4 per cent at the end of March 2008.
However, in a challenging environment, more companies, especially in the small and medium sector, will either not be in a position to pay back loans or will delay them. That, say analysts, could cause npls to nearly double to about 5 per cent of the loan book though it’s unlikely they’ll rise above that and should remain well below the highs seen in the late 1990s. Nevertheless, they will need to set aside more of their profits to provide for bad loans.
Rising npls in themselves would not have hurt as much except that opportunities to lend will also be fewer over the next couple of years. On the back of a roughly 25 per cent growth in credit in 2008-09, loan growth could come off to around 17-18 per cent in 2009-10. Lending to high-risk spaces such as real estate and NBFs will be out while delays in capex will automatically reduce the demand for money from companies.
However, the share of corporate credit will rise because banks will scale back lending to individuals. From about a fourth of the loan book in 2007-08, retail loans might account for just about 15 per cent of the book in 2009-10. The lower growth in loans would hit revenues from fees which are to some extent leveraged to both retail and corporate lending. All in all, it isn’t going to be an easy time for banks.