Indian banks performance: It could get worse

Feb 17 2014, 10:02 IST
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Slow loan growth and rising credit costs suggests sluggish performance for Indian banks ahead. (AP) Slow loan growth and rising credit costs suggests sluggish performance for Indian banks ahead. (AP)
SummarySlow loan growth and rising credit costs suggests sluggish performance for Indian banks ahead.

A combination of slowing loan growth and rising credit costs suggests further sluggish performance for Indian banks ahead

Q3 profitability: Mild convergence between PSU and private banks but gap remains wide.

We have Underweight ratings on PSU banks and Overweight ratings on private banks.

Q3 performance did not surprise largely, as margins remained stable and so did NPL ratios. Accelerating loan growth for public sector banks after three quarters of consolidation is a concern, especially as core ROAs continue to decline for them, now at below 0.5%.

Loan growth picked up for both PSU banks and private banks: Riskier SME segment led PSU loan growth, whereas private banks continue to focus on retail-led growth. Loan quality rather than volume is likely to continue to exert pressure on credit costs at PSU banks, now above 100bps.

Asset quality trends positive but sustainability is unclear for PSU banks: Despite plateauing of impaired loans for PSU banks, credit costs likely to rise given no visible turnaround in the credit cycle. Also, the restructured book continues to bulge, partly even in some private banks although at a much lower pace than PSU banks.

Macro remains challenging with growth at a multi-year low and interest rates near highs; Watch out for inflation (especially core) readings next week, although Q4 seasonal tightness likely to keep short rates elevated.

HSBC

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