Driven by reasonably good loan growth and stable net interest margins (NIM), pre-provisioning profits for the banking sector (sample of 35 banks) have risen by 32% in the three months to December 2010.

However, with provisions and contingencies having gone up by nearly 40%, the rise in net profits has been restricted to 25%. Going ahead, while provisioning is expected to come off, the higher cost of funds and a deteriorating macro environment, in which loan growth may be subdued, could keep profit growth somewhat muted. Surprising the street, SBI reported an increase in net profits of 14% year-on-year, with the bank posting better than expected NIM of 3.6%, up 80 basis points year-on-year, and a fairly good loan growth of 22% year-on-year. Margins were driven by lower funding costs as Casa jumped to 48.2%.

?We expect asset quality to show a marked improvement in the coming quarters,? said Bank of America Merrill Lynch. ?However, even though asset quality has remained stable and the provisioning coverage ratio improved to 64%, incremental provisions needed to achieve the 70% coverage mark provisions for dual rate loans, if required, and a hit on the investment portfolio which needs to be marked to market are likely to remain an overhang on profitability,? observes Enam Securities.

With a 33% rise in net profits, HDFC Bank has been the star performer in the December 2010 quarter. Both net interest income and fee income grew more than 25%. With provision coverage at over 81% and restructured advances at just 0.3% of the gross advances, HDFC Bank has one of the cleanest books in the business.

Driven by a sharp fall in provisions, ICICI Bank?s net profit increased by 30.5% year-on-year though the bank?s operating profit fell marginally. The increase in the Casa ratio to 44% helped achieve NIM of 2.6%. ?We are somewhat disappointed with the margin outlook, especially on a relative basis as most other banks are witnessing an improvement, ? says Kotak Securities.

Higher net interest income and better productivity helped Bank of Baroda?s post a rise in profits of 28.4%. Union Bank?s margins were strong at 3.4%, which coupled with a reasonably good loan growth of 24% year-on-year, drove up net interest income by 48%. However, fee income growth remained muted.

Narrowing NIM may hit banks? profitability: Fitch

International rating agency Fitch on Monday has said the profitability of Indian banks to exhibit neutral to negative trends as a narrowing net interest margin (NIM) in a rising interest rate regime will likely moderate their profit growth. However, pressure on profitability due to possible narrowing down of NIM will be balanced by a possible reduction in credit costs as NPAs accretions begin to ease for the Indian banks, said the report. Though Fitch’s outlook on long-term ratings for Indian banks currently remains stable in 2011, above average loan growth and sharp rises in system interest rates together with any macroeconomic shock could result in the outlook turning negative for some banks. Strong loan growth may result in a rising proportion of wholesale funding, partly from refinancing institutions.