With the economy now clearly gathering momentum, it?s not surprising that banking stocks are galloping. Indeed, the BSE Bankex has outperformed the Sensex over the last one, three, six and twelve months. Over the past year, the BSE Bankex has gained nearly 123%, whereas the Sensex has returned just over 70%.
While earnings for Sensex in the March 2010 quarter will not be driven by banks ? the credit for that will go to metals stocks, which could see their Ebitda grow some 400% on a low base ? they are expected to do well. After all, growth in non-food credit has seen an uptick, hitting RBI?s targeted 16% for the fortnight ended March 12, and the numbers should be equally good if not better in the last fortnight of the year.
While they may not be delirious about the numbers, they certainly compare favourably with the 10% growth in October 2009 and bankers must be glad that there are more borrowers, whether they are retail, SME or large corporate borrowers.
The higher loan volumes together with better net interest margins (NIMs) should help banks post reasonably good growth in the net interest income of anywhere between 25% and 30%. Indeed, banks have been flush with funds and therefore, have paid their depositors precious little for their savings in the three months to March 2010, which is what will drive their margins.
That will change somewhat with the new calculations for the savings rates, but still, NIMs shouldn?t be hurt by over 10 bps.
Besides, March 2010 will be the last quarter when banks enjoy low deposit rates; many have already upped rates by 25-50 bps for shorter maturities. Also, the share of term deposits will go up as rates go up, bringing down the share of cheaper Current and Savings Accounts.
Where banks will be hit in Q4 is in their securities portfolios because most of them had earned huge amounts in the three months to March 2009. However, the fact that the yield on the 10-year benchmark bond closed lower than 8% at the end of Q4 will mean less of a hit to their bond portfolios. Banks need to mark-to-market that portion of their portfolio which is classified as ?available for sale? and some public sector banks could be hurt.
Although business environment is improving, delinquencies may not have peaked and so, the quarter could see as much of deterioration in asset quality of banks as there was in the three months to December 2009. As such, they might be required to set aside a fair amount in the form of provisions, which of course, would eat into profits. However, the trend should reverse in the June quarter, when banks should see a smaller increase in their total non-performing assets. Thus, while a couple of PSU banks could see their net profits dip during the Q4, others will see a rise of 10-20%. State Bank of India?s profits could stay flat. The private sector banks will fare much better; while HDFC Bank should turn in a 30% rise. The smaller private sector banks could post smarter increases in their net profits anywhere between 45-50%.