Banking results for the quarter ending September 2008 were anticipated with more-than-usual interest, given that banks have become the face of the crisis. Those waiting for dramatic bad news would have been disappointed: business growth remained strong with credit growth at 26% and deposit growth at 22.5%. And ICICI Bank demonstrated that a drop in performance is not the same as worries about survival. The public sector banking giant State Bank of India posted very non-crisis like numbers such as a 40% growth in net profit for the second quarter of this fiscal on high interest income. Union Bank of India and Canara Bank saw net profits grow by 31%, and Bank of Baroda?s profits rose 21%. In the private sector, HDFC Bank?s net interest income, which is interest earned on loans minus that paid on deposits, rose by 60% in Q2 FY09 over the same period last year, mainly driven by an average asset growth of 52.5%. But its net interest margin, or the difference between what it charged for loans and paid for funds, too widened marginally to 4.2% in the quarter ending September 2008. ICICI Bank, which has the largest foreign exposure among Indian banks, reported a marginal 1.1% increase in its earnings to Rs 1,014 crore from Rs 1,003 crore in the corresponding period of the previous quarter. However, the dampener was the bank?s UK subsidiary which reported a $46 million loss against a $17.2 million profit last year on the back of higher provisioning and its life insurance subsidiary ICICI Prudential Life Insurance reported a loss of Rs 466 crore in the first half of this year. As a result, on a consolidated basis the bank?s net profit was down by 27.5% as compared to last year.
Looking ahead, margins will remain under pressure and the stress will likely be more visible from Q3 FY09 onwards. For small public sector banks, the net interest margins would be under pressure in the near term because of tight liquidity conditions and for private banks, asset quality would be the key factor to monitor. Risks to asset quality deterioration remain high especially from the SME sector and retail delinquencies are already visible as is evident from ICICI Bank?s results which reported gross NPAs at 4.2% in Q2 FY08 as against 2.8% in the same quarter last year. Under such circumstances, stock performance may remain under pressure in the near-term. However, triggers are falling in place for a reversal in the interest rate cycle in 6-12 months, including receding commodity prices and slowing M3 growth. For large private sector banks, the long-term prospects remain strong for those who continue to gain market share, especially in current and savings accounts and fee income.