Asset quality will remain in focus

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: While the global banking sector is in shambles, the Indian banking industry, while facing its own battles, has been building advantages. Fund managers and research outfits reckon that the sector will have to gear up to the slowdown as well and focus on asset quality in the times ahead. At the moment, things look rather smug.

Analysts at Prabhudas Lilladhar reckon that the Indian banking sector has remained relatively unscathed from the global meltdown and has reported strong operational performance, with many banks reporting the highest profit in a single quarter. A majority of the players witnessed lower-than-expected deterioration in asset quality at both gross and net NPA levels, along with healthy provisioning coverage.

After speaking with several bankers, Prabhudas Lilladhar analyst say, “Most banks conceded that they had enjoyed excellent pricing powers during Q3FY09, which they had not seen in their entire banking careers spanning close to 20-25 years.” However, these times are set to change fast as sub-PLR lending has started again and the margins will be under pressure.

IIFL analysts, in a banking sector report, also mention that margins will be under pressure and fee income would also be lower in the days to come. “Over the last couple of months, banks have been cutting both lending and deposit rates, and at the same time, wholesale borrowing costs have come down significantly from their November 2008 peaks,” they add.

“Asset quality will hold up as the bulk of restructuring and rescheduling is expected in Q4FY09. Real NPL issues could surface from Q2FY10 onwards, if the stimulus packages don't succeed in reviving industrial activity and the resultant economic growth,” say analysts at Enam Securities.