Banking Sector March 2012 Quarter Preview

The banking sector started its fourth quarter of FY12 on the back of hopes that the interest rate would soon get reversed. However, the quarter ended with the rate remaining unchanged. The sector still has its eyes on the rate, waiting for it to take a U-turn. Meanwhile, the space experienced relief in terms of liquidity as the Reserve Bank of India (RBI) slashed the cash reserve ratio by 125 basis points to 4.75 per cent during the March quarter of FY12. We believe the banking players would see decent growth in bottomline but would continue to feel pressure on the asset quality front.

The credit growth for the sector has remained tepid on the back of an uncertain macro environment. The RBI, in its monetary review of January 2012, scaled down the non-food credit growth to 16 per cent for FY12 as against the earlier estimate of 18 per cent. One has to closely watch out for the credit growth of the banks that is expected to remain muted during the quarter. However, banks like HDFC Bank, ICICI Bank, Bank of Baroda, etc are expected to outperform the industry credit growth. The quarter may see an increase in lending for priority sectors such as agriculture, small scale industries, etc as the banks needs to lend around 40 per cent of the loans for such sectors during a financial year, as stipulated by the RBI. The deposit growth would be more or less around the RBI’s projections of 15.50 per cent for FY12.
   
Further, with the interest rate unchanged, the net interest margins (NIM) would more or less remain at the same level on a sequential basis. The hike in the non-resident deposit rate will impact those banks with higher exposure to NRI deposits since this may lead to some pressure in their NIMs. The margins of major banks like State Bank of India, ICICI Bank and HDFC Bank may improve marginally.
 
The asset quality of some of the banks may continue to deteriorate primarily due to exposure to risky sectors like telecom, aviation, textile, etc. In particular, banks having more exposure to companies like Kingfisher, Tata Teleservices (Maharashtra), HMT, etc and also to the distressed state and central electricity boards might get affected. According to media reports, a Crisil report state that instances of default by Crisil-rated entities increased to 188, the highest for any year.

With capital infusion in most of the public sector banks, the capital adequacy ratio of the PSU banks may see improvement in the fourth quarter of FY12. The public banks may see their Tier 1 CAR at more than 8 per cent.
   
Overall, the results would be as per the market expectations of a muted credit growth, more or less stable net interest margin (NIM) and pressure on their asset quality. The much-awaited interest rate reversal might be seen in the first quarter of FY13 if inflation comes under the RBI’s comfort zone. None the less, we will post updates on our website as and when they declare their March quarter numbers. Following is the list of some private sectors banks (public banks’ details are not available as of now) and the dates when they are going to declare their results.