Banking stocks have once again come under the hammer as the BSE Bankex fell by 4.16% on Friday. This was amongst the series of falls that the banking sector has witnessed since the beginning and despite announcing strong results.
The drama of banks announcing strong results and the share price tanking has been playing out since banks have started announcing results. Analysts attribute this to the testing times ahead for the banking sector.
Since the beginning of the year, the BSE Bankex has fallen by 19.70%, much more than the 12.4% fall recorded by the Sensex. According to a study carried out by FE on 20 banks that have announced their results, the return on total income of the 20 banks increased during the October-December 2008 period as against the previous level in the corresponding period of last year. SBI and ICICI Bank, which will be announcing their results on Saturday, are not a part of this survey.
Analysts reckon that the superb numbers reported by the banks are largely due to higher treasury incomes. The other income of the banks increased by 35.6% to Rs 6,665 crore during October-December 2008. Bond yields at the beginning of the quarter were pegged at 8.46% and these slipped to 5.25% by the end of the year creating a huge rally in bond prices. ?These rates are likely to fall slightly and then will remain stable at the lower end for rest of the last quarter,? a fund manager said. Therefore earnings from this source could dry up.
Analysts at Enam Securities point out for HDFC Bank that, ?Profit on sale of investment at Rs 230 crore jumped sharply (77% y-o-y) as the bank booked gains on its bond portfolio.? Similarly for Axis Bank they say, ?Current account and savings account (CASA) proportion has declined by over 200 basis points sequentially to 38% leading to a 68 bps increase in cost of funds to 6.91%. This has resulted in a 39 bps decline in NIM to 3.12%.?
For around 60% of the banks that have reported their earnings, the portion of CASA has dropped. ?Banks resorted to luring customers towards high cost deposits and have been saddled with these funds. Now, with the central bank signalling a low rate regime, these funds will have to be lent out at lower costs and the net interest margins are likely to be under pressure,? the fund manager added. ?This is one of the reasons why banks have been reluctant to lend to corporates and play in the bond or SLR markets. Now, with the yields likely to stabilise and also the gains from bond trading, these high cost funds will have to be lent out at lower rates and hence earnings will be impacted, he concluded.
In addition there are other concerns as well. With the corporate governance scenario getting tighter several companies are likely to report bad numbers and default as well. This has put additional pressure on the quality of earnings. Morgan Stanley analysts, while summarising the concerns to earnings in the banking list out these factors, ?Change in restructured loan norms, allows banks to report lower NPLs in current tough environment, loan waiver increases risk of moral hazard and potential rise in NPLs and loan growth target by RBI to state owned banks.?