Lower credit offtake, lower income from foreign exchange businesses, and capital market operations could hit bank profitability in the coming quarters, reckon analysts.
Indian banks, especially foreign banks and new private sector banks, have been aggressive in selling exotic foreign exchange derivatives.
For banks like HDFC Bank and ICICI Bank, income from foreign exchange revenues was estimated to be around 12% to 17% of the profit before tax (PBT).
A study by Morgan Stanley Research suggests that exposure to exotic derivatives; by Indian banks and foreign banks operating out of India has grown by 291% to touch Rs 127.9 trillion in December 2007, as compared to the same month in the previous year.
This is expected to take a hit as the market unwinds. Analysts estimate that the mark to market losses for banks could be around $6 billion.
Meanwhile, the move by the Institute of Chartered Accountants of India (ICAI) to have corporates report derivative losses may have a serious impact on defaults. Not to mention the legal risk of selling exotic derivates to the SME sector.
Currently, 70% of the exposure is to large quality companies and around 25% is to SMEs, which are susceptible to losses, says an SSKI report.
Private sector banks were also seen taking an aggressive stance in the capital markets by proprietary trading.
HDFC Bank and Axis Bank saw capital gains contribute 14% and 28% respectively to the PBT.
Loan growth, which was about 33% in FY07 is expected to be around 21% in the current fiscal. With inflation numbers running high, another prospective rate hike or liquidity squeeze by the central bank will only add to the slowdown.
