Public sector banks are likely to report a decline in their profitability for the third quarter of FY14 due to lower margins, higher expenses and a mark-to-market (MTM) hit on their bond portfolio, say analysts.
"On a y-o-y basis, government banks’ lending rates are lower and funding costs higher, while q-o-q, a lack of high margin lending opportunities and festive discounts on retail loans will hurt margins," Rajeev Varma and Veekesh Gandhi, analysts with Bank of America Merril Lynch (BofA ML), said in their report on Tuesday.
However, experts believe that State Bank of India (SBI) will be the only state-owned lender to report an improvement in its margins on a q-o-q basis, thanks to a 20-bps increase in the base rate. The country's largest bank had hiked its base rate to 10% in November, owing to increased cost. Slower loan growth, too, is expected to hit the banking system adversely, as demand has dropped significantly since the first half of the year. Analysts expect government banks to report a 15-16% y-o-y credit growth in the October-December period against 18-19% y-o-y in the July-September quarter. Credit growth has slowed in the quarter, largely because corporates have shifted to the bond market against the previous quarter where they were aggressively tapping the bank loan market.
Asset quality issues with public sector banks are expected to continue. However, the pace of slippages will remain the same as the last two quarters, analysts say. While state-owned banks may see loans being restructured at the same pace, it is possible that the quarter may see a reduction in the total restructured loan portfolio.
"Implementation of the FRP (financial restructuring plan) for SEBs would imply select banks witnessing a reduction in their restructured portfolio, which would allow them to utilise those provisions elsewhere," analysts at Kotak Institutional Equities noted in their report.
In addition, government banks will continue their provisioning for the MTM hit they took owing to Reserve Bank of India's (RBI) liquidity tightening measures in July. Analysts see the pace to be similar to the July-September quarter