Banking Q3 preview: Could be the last good quarter

The consensus is that here onwards the sector will see margin contraction due to higher costs of funds

The December quarter saw tighter liquidity conditions, a higher increase in deposit rates than lending rates and a sharp rise in the cost of wholesale borrowing. While this will seriously affect banks, it will have a bigger effect on non-banking financial companies which depend more on wholesale borrowing. This time, banks have been relatively fast in realigning loan and deposit rates to liquidity conditions and this will help prevent a sharp fall in margins, but an expansion from here on looks unlikely. So far, the credit-to-deposit ratio remains strong, indicating banks have pricing power. The festive season also helped with the higher growth in auto and home loans.

Trading profits are likely to fall this quarter and the operating expenses of state-owned banks in particular are expected to rise as they provide for pension and gratuity. The 10-year government securities yield increased by about 10 basis points in the December quarter, but the yield on the one-year and two-year securities increased by about 80 basis points and 50 basis points. Fee income could be higher overall, but treasury gains will moderate.

Pension liabilities are likely to put pressure on expenses, because under the new wage agreement all existing employees now have the option to join the defined benefit pension scheme. This is also open to employees who have retired or to the families of those who have died after the pension regulations came into force in 1995-96. Banks are asking the Reserve Bank of India (RBI) to allow them to amortise their pension liabilities over the next five years.

While there is hope that the next quarter will be better in terms of liquidity, with lower government borrowing and higher open market operations from the RBI, this is not a certainty. Some players expect the tightness to continue well into Q1FY12.

Average loan growth for most banks is expected to be upwards of 20%. Lagging deposit growth remains a concern, although with most banks drastically increasing their deposit rates this is expected to improve rapidly. Most market watchers expect asset quality to improve for private sector banks and slippages to continue for public sector banks. Provisions are expected to trend down for private banks more than public sector banks.

The BSE Bankex has fallen 7% in a month against the Sensex drop of 2%. This puts it right among the underperformers such as real estate (down 8%), auto (down 5%), power (down 3%), oil & gas (down 4%) and capital goods (down 8%). Despite the lower-than-expected results of Infosys pulling the sector down, IT is one of the outperformers (up 3%) along with FMCG (up 2%) and healthcare (down 1%).

Axis Bank
The corresponding comparable quarter (Q3FY10) had seen capital raising, which had led to a sharp rise in net interest margin (NIM) improvement to 4%-NIMs will be lower compared to that but won't fall sharply quarter-on-quarter. In H1FY11, NIM was 3.67%. Trading profits could be lower. Asset quality will be keenly watched-but in general slippages are expected to be lower. However, what happens to slippages from the restructured portfolio will be monitored. Loan growth is expected to be upwards of 35%.

Bank of Baroda
Loan growth is expected to be more than 30%. Fee income could be higher, but treasury gains will be limited. Employee expenses will drive overall expenses higher. Asset quality should be stable but will still be keenly watched. Margins may contract slightly.

Loan growth is expected to be above 20%. HDFC Bank will continue to buy out loans from HDFC, thereby muting the latter's own growth rate. HDFC has hiked its prime lending rate by 75 basis points from December 2010 and has also stopped lending under teaser rates. Even so, with increasing costs of funds, its margins could shrink a bit. It is likely to book treasury gains from the sale of its IL&FS stake amounting to Rs1.7 billion.

Margins could decline. Fee income is likely to be strong. Provisions will be lower with better asset quality. Higher IPO float balances should help. Loan growth will probably continue to be strong.

Domestic loan growth will be good and will realign itself with industry growth rates but international business could be muted resulting in an overall growth of about 15%. In the last quarter, the bank was flush with liquidity and this will help margins. Fee income will be strong, provisions lower, and asset quality better. CASA should continue to improve.

Punjab National Bank
Loan growth is expected above 30%, but trading profits could be lower. Employee-related expenses will hike operating expenses. This is the quarter in which the bank will make a final disclosure about its second pension option liability. The bank has guided for Rs4.8 billion gratuity-related liability and Rs25 billion for second pension option earlier. Slippages will probably continue to be higher and so also provisions. Net profit growth will be muted.

State Bank of India
Loan growth could be upwards of 20%. CASA growth will be very strong. Margins will probably contract since SBI was sluggish in raising lending rates. Fee income growth should be strong, but trading profits could be lower. Provisions could be higher to meet requirements. Slippages could continue to be high and will be keenly watched.


Friday’s Market Preview: Cautious opening likely, focus on Dec inflation data

The local market is likely to open on a cautious note on negative global cues. The wholesale price index-based inflation data for December and corporate earnings will also provide some direction to the market later in the day. Markets in the US closed lower overnight, weighted down by a rise in weekly jobless claims while the Asian pack was mostly in the red on weak US jobless claims data. The SGX Nifty was down 9.50 points at 5,752 against its Thursday’s close of 5,761.50.

The market opened in negative territory on Thursday on lower-than-expected quarterly earnings announced by IT bellwether Infosys Technologies. Some pull-back was noticed towards noon, but the weekly food inflation data added to the woes, dragging the indices further southwards. Nervousness ahead of the wholesale price index-based inflation data, due to be announced today, kept the indices range-bound in the post-noon trade. Another minor bout of selling in the last half-hour resulted in the market touching the day's low and closing marginally higher, albeit in the red.

On Wednesday we had said watch out whether the index trades on Thursday above the previous day's high, for indications of strength. The Sensex and Nifty traded below yesterday's high in the morning session and soon the bears took over. Eventually, the Sensex fell 351 points at 19,183 and the Nifty fell 111 points at 5,752 wiping off yesterday's gains completely.

US markets closed lower on Thursday on disappointing initial jobless claims data. The Labor Department reported that the number of workers filing initial jobless claims unexpectedly increased by 35,000 to 445,000 in the week ended 8th January, higher than analysts’ expectations. In other news, US producer prices rose in December, rising a seasonally adjusted 1.1% in December from November. However, cutting out volatile food and energy items, producer prices increased 0.2%.

Meanwhile, Intel forecast first-quarter sales that may beat analysts’ estimates, as companies spend on new computers. The stock ended regular trading slightly down at $21.29 a share.

The Dow declined 23.54 points (0.20%) to 11,731.90. The S&P 500 fell 2.20 points (0.17%) to 1,283.76 and the Nasdaq shed 2.04 points (0.07%) to 2,735.29.

Markets in Asia were seen with marginal cuts in early trade today on disappointing US jobless data. However, losses were limited by Intel’s strong fourth quarter earnings reports on higher demand from businesses and consumer PC markets.

The Shanghai Composite tanked 0.91%, the Jakarta Composite declined 0.22%, the KLSE Composite fell 0.14%, the Nikkei 225 was down 0.29%, the Straits Times declined 0.73% and the Taiwan Weighted lost 0.09%. On the other hand, the Hang Seng was up 0.10% and the Seoul Composite gained 0.07% in early trade.

Promising to crack down on black marketers and hoarders, the government on Thursday unveiled measures to check spiralling prices by deciding to continue ban on exports of edible oils, pulses and non-basmati rice and asked states to waive local taxes on essential commodities.

After two days of discussions at the highest level, chaired by prime minister Manmohan Singh—on a day weekly food inflation showed some moderation—the government constituted an inter-ministerial group under chief economic advisor Kaushik Basu to review the overall inflation with particular reference to primary food articles.


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