Even as the Reserve Bank of India (RBI) is
readying to cut the repo rate for the first time in three years in its monetary policy review next week, bankers have little to cheer when it comes to performance.
The tight monetary policy, moderating credit demand and slow deposit growth are expected to
weigh heavily on the fourth quarter (January-March) earnings of the banking industry in 2011-12.
Analyst reports indicate that
earnings are likely to be under pressure due to decline in net interest margins (NIMs).
NIM, which is the main source of income for banks, plays an important role in determining their profitability and is the percentage difference between the interest income produced by a bank's earning assets (loans and investments) and its major expenses.
"We expect NIMs to decline marginally in the current quarter as cost of deposits will continue to reprice upwards while lending yields have peaked at previous quarter levels. It's expected NIMs to decline by about 10-15 bps across banks though select banks could deliver improvement," says a Kotak Institutional Equities report.
The report pegs
earnings growth for banks at 4 per cent year-on-year with private sector banks performing better than their public sector counterparts.
A report by credit rating agency Care Ratings sees a slowdown in the credit disbursement from 21.5 per cent growth in 2010/11 to 17 per cent growth in 2011/12 on account of higher costs of borrowing and shelving of investment plans by corporates.
"Continuing with its monetary tightening stance, the
RBI raised repo rate by 175 bps during 2011-12. In a bid to safeguard their bottomline, banks have transmitted this interest burden onto customers. As a result, manufacturers kept their financing of working capital at the minimum necessary level thereby lowering demand for credit," the report says.
Growth in deposits moderated too, as individuals shunned conventional bank deposits in favour of other attractive investment options during the past financial year.
While borrowing rates increased substantially, deposits rates remained rather stagnant at lower levels (of 9.25-9.50 per cent) which prompted individuals to invest in mutual funds. The evidence is the net investment position of mutual funds which has grown by 39.6 per cent in 2011-12 over 2010-11.
With the
RBI's annual credit policy slated to be held on April 17, analysts are also
predicting a CRR cut of 50 bps which would release Rs 32,000 crore of permanent liquidity into the system.
"It may be premature to cut interest rates at this point in time as pressures from food subsidies and concerns on inflation with global oil prices persisting at high levels, feeding back into prices prevail. Hence, we expect no change in the repo rate," says Care Ratings report.
Clearly, the future of the banking sector depends largely on how well it will be able to weather this storm.
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