The June quarter financials for banks are likely to be similar to that of the March period. Strong net interest income (NII) growth, falling treasury income, and marginal slippages in the asset quality may continue. Also, with the September deadline for achieving the 70 per cent provision coverage on NPAs (as mandated by the RBI) approaching, there may be greater costs compared with the March quarter.
Banks may post good NII numbers in the June quarter against the same quarter last year due to improvement in core business (lending). The improving credit offtake and consequent improvement in the credit-deposit ratio are expected to help NII growth.
Credit-deposit ratio has improved as the low yielding excess cash has been deployed in high return loans, and also due to moderation in deposit inflows. This may help banks improve yields and reduce interest rate risk.
As of June 18 (latest available data), the net bank credit of commercial banks grew 20 per cent year-on-year (driven by demand from telcos) against a 15 per cent growth in the preceding year. Deposits grew by 14 per cent year-on-year compared with 21 per cent during the same period year ago. Overall, the credit-deposit ratio improved to 73.28 per cent from 69 per cent as of June 26, 2009.
Net interest margins
The net interest margins of most commercial banks bottomed out in the first quarter of 2009-10 and have been on an uptrend since then. The trend may continue this quarter. However, the rise may be limited for two reasons — the 100 basis points (bps) hike in CRR over the last seven months, and the increase in cost of savings bank accounts (due to the changed interest computation rules). Around 22-23 per cent of the total deposits of commercial banks come from savings bank deposits. Therefore, a 50 bps increase in these deposits could shave off in excess of 10 bps from margins.
The yield curve of gilts has flattened further in the last quarter, with 10-year yields falling by 38 basis points to 7.54 per cent, while the 5-year paper fell by around 18 bps to 7.37 per cent against a sharp rise in the one-year bond yields to 5.41 per cent. This would mean treasury income of banks will continue to be modest. Banks may have re-shuffled their investment book this quarter to shield against the interest rate risk.
Pressure from high cost of borrowing and low treasury income would mean that the net revenues (net interest income plus the other income) for banks would grow in line with credit-growth.
Asset quality is another area of concern for banks as some slippages have been recently seen in loans restructured over the last two years. This trend may continue despite the revival in business environment.
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