RBS has downgraded Indian banks to 'Neutral' from 'Overweight' as it expects them to remain under pressure in the next few quarters due to falling net interest margins, decelerating growth rate and higher credit costs at public sector banks.
"We think the slowdown of GDP growth and high interest rates will start taking a toll on Indian banks' earnings in FY3/12, which will be reflected in a slower loan growth (around 15-16%), higher non-performing loans and, thus, lower earnings growth," RBS said in a report.
The 10 banks that reported their earnings saw their loan growth, on an aggregate basis, slow to 22% y-o-y in the first quarter. Among them, Indian Overseas Bank was the only exception with a 43.6% y-o-y loan growth while ICICI Bank maintained its growth momentum.
Axis Bank grew its loans by only 21% y-o-y down from 36% in FY3/11. The high interest rates are hurting economically-sensitive sectors like telecom, infrastructure, real estate and power. So banks with a higher exposure to these sectors will be impacted and will see a rise in their non-performing loans (NPL).
Also, many banks have set aside higher loan loss provisions due to stricter RBI provisioning standards while some are yet to switch NPL recognition to systembased, which usually results in higher NPLs. Bank of India, IDBI, Canara Bank and Punjab National Bank (PNB) reported more than a 20bps q-o-q increase in their gross NPL ratio.
However, many Indian banks reported robust loan growth in their overseas business. For instance, Bank of Baroda's overseas loans grew 7.5% q-o-q whereas its domestic loans fell q-o-q. "There has been a similar trend in many other banks which suggests Indian banks will continue to tap the dollarfunding market for bonds," said the report.
RBI has revised the credit growth target to 18% from 19% in this fiscal, after it raised the key rates by sharp 0.5 percentage points in its monetary policy review on July 26. This is the eleventh time since March 2010 that the RBI has raised the interest rate to curb runaway inflation.
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