With RBI facilitating to increase the flow of credit along with easing yields on government bonds, banks are expected to see a robust growth in the quarter ended December 2008.
The top Indian banks in the industry are likely to clock a growth rate of nearly 40% on year-on-year basis for the quarter ended in December. The profit margin of the banks is expected to rise at the backdrop of rising credit growth. As per the RBI data, bank credit raised by 24.6% year-on-year on December 19th, 2008. Much better was the incremental credit growth at 41% recorded for the nine months of the fiscal and even the deposit increased by 20.6% for the same period.
As on December 19th 2008, credit growth was recorded higher than the deposit growth, as a result of which the net interest income (NIM) is expected to rise at a higher pace. However the research team of various brokerages expects the NIM to remain unchanged for the last quarter. "We expect margins to remain stable despite the PLR cut of 125-150 basis points (75 bps w.e.f January 1, 2009), as the banks have reaped the benefit of CRR cut (350 bps in December quarter) and have demonstrated their pricing power to corporate," stated the Motilal Oswal preview report on earnings.
The main reason for a stable NIM is attributed the declining prime lending rates of the banks. Basically the PLR are coming down due to the efforts made by the RBI to enhance credit growth. The measures taken by the RBI in the last quarter include cutting of cash reserve ratio (CRR), repo and reverse repo rate.
During the quarter ending on June 2008, the yields on government bonds has raised due to increasing inflation and tightening liquidity following which various banks witnessed mark-to-market (MTM) losses on their available-for-sale government security portfolio. Moreover such losses were higher in PSU banks as they had greater exposure to the available-for-sale category investments. But during the quarter ending on December, these losses are expected to be inverted.
For instance, a zero-coupon government bond with a 10-year maturity started yielding 9.6% on June 30th, 2008 against 8% as of March 31st, 2008.
Prabhudas Lilladher said on its preview report said, "Among the banks, SBI, Bank of Baroda and Union Bank stand to gain the most on account of MTM reversals."
However the profit margin of banks continues stay under pressure in the coming times due to the emergence of low interest rate regime and lending rates softening faster than the borrowing rates. But banks would need to maintain their credit growth that is most likely to climb in the coming months.
The PSU banks expected to see a lead in growth include SBI, Punjab National Bank, Bank of India and Union Bank. On the other hand, private banks expected to lead are HDFC Bank and Axis Bank.
Although the growth is anticipated to rise, banks would continue to face rising NPAs because of the slowdown in exports and industrial sectors.