Banks may have reported a drop in fresh slippages in the three months to December 2012, and the additions to both gross and net non-performing assets (NPAs) portfolios may have been just10 basis points, but one canít be sure they wonít trend up again. So far, itís mainly mid-corporate exposure that has turned toxicóKingfisher Airlines, for instanceóbut the next round of loan losses could crop up in the large corporates portfolio. Given the economy isnít yet back on track, itís quite possible that restructured loans, which, for public sector banks, dropped by about 30 basis points sequentially to 7% of total loans, might see an uptickóclose to R63,000 crore worth of debt has been recast by the corporate debt restructuring (CDR) cell in 2012-13 so far.
More than concerns on asset quality, though, it was the earnings growth, at just 8% yoy, that was disappointing given it came off the muted base of Q3FY12. The bad news is that profits are unlikely to regain much momentumóKotak Institutional Equities estimates earnings will grow at a compounded 9% between FY13-FY15. The main reason why profits will grow at a slower pace is because business is expected to be dull with fewer opportunities for banks to lend. Loan growth averaged 14.5% in the December 2012 quarter, but between April and January this year, non-food credit has grown a muted 7%. Although the yoy growth of 16% is far more robust, itís way below the long-term average of 20%-plus. Since much of the business in recent years has been sourced from the infrastructure space, a near-empty project pipeline is fuelling fears of shrinking demand for project finance. Moreover, falling consumption spends suggest demand for retail loans too might drop off; in any case, they account for under a fifth of total loans. With a bit of luckóa few projects taking off and capacity utilisation picking upóbanks should be able to grow their books by about 13-14% in the next couple of years. However, even as they scramble for assets, banks will have to live with falling yieldsónet interest income grew at just 8% in Q3FY13 compared with 11% in Q2FY13 and 20% in Q4FY12, and SBIís net interest income actually fell 3% yoy in the December quarter. While the competition for business will put a lid on interest rates, banks will find it hard to lower interest rates on deposits given theyíre hard to come