Some early financial results of banks for the quarter ended June show pressure on margins largely due to lower credit offtake?it has gone down to 16% year on year in the quarter compared with 27% in the same period last year. While banks that have relied on wholesale funding will gain from the decline in deposit and borrowing costs, re-pricing gaps in loans and deposits will impact their net interest margins.
The growth in deposits has remained almost unchanged from the quarter ended March and the excess deposit mobilisation has found its way to government bonds as RBI data shows investments in G-secs have risen by 29% in the June quarter compared to 20% in the March quarter. With no clarity on the future of interest rates, it is likely that banks may have to incur losses in the coming quarters.
For HDFC Bank, its net interest income at 8% YoY was lower than expected, but the bank?s fee income grew at a reasonably strong 27% YoY. Interestingly, the bank continued to focus on cost controls, with operating expenses down 1% sequentially and the cost-to-income ratio declining to 48% from a peak of 56% in 1QFY2009.
In the early part of the quarter, bond yields had corrected by as much as 50-100 basis points across maturities and coupled with the strong bounce back in the equity market, treasury income of banks in the quarter ending June is likely to be good. Also, since long-term bond yields remain almost unchanged in the quarter, there is unlikely to be any MTM provision for banks during the quarter. Asset quality concerns, though receding, remain a vital metric to monitor the results.
Going ahead, due to high incremental deposit ratio and reverse repo balances at a massive Rs 1.57 lakh crore, the buffer that is created by these low-risk liquid assets is large. As a result banks should increasingly find themselves comfortably placed to weather any credit or liquidity risks. And with the capital markets reviving and equity issuance on the rise, corporate leverage levels are also expected to come down in the next few quarters, which will provide a base for revival in commercial and retail loan growth.