Bangalore: State Bank of India, the country's top lender, and rival ICICI Bank are likely to post lower quarterly net profit on sluggish credit demand and a fall in treasury incomes as bond yields rose.
But increasing business and consumer confidence is reinvigorating corporate, housing, auto and retail demand in Asia's third-largest economy, with banks looking to improve their asset quality.
Bank credit grew an annual 13.7 percent in early January, having fallen to 9.7 percent in October despite a reduction of 300-350 basis points in lending rates since the global crisis.
"There are some signs of improvement in credit growth and it will gradually recover," said Srividhya Rajesh, fund manager at Sundaram BNP Paribas Asset Management, which holds shares of State Bank and ICICI.
"As economic growth picks up, we could see a decline in bad debts as well."
Indian banks were mostly insulated from the direct impact of the global credit crisis, but the world downturn hit the country harder than expected and led to a sharp slowdown in credit growth in the current financial year.
While the Reserve Bank of India has projected 18 percent growth in loans for the year through March, banks say they may fall short and end the fiscal year at 15-16 percent credit growth -- still a far cry from growth rates of more than 30 percent over the past few years.
HDFC Bank last week reported a 32 percent rise in quarterly profit as the second-ranked private sector lender rode robust loan growth, and analysts said they expected the bank to maintain that pace in the coming quarter.
Banks have urged the central bank to keep interest rates stable at its policy review later this month, saying any increase could further dent sluggish loan demand.
Analysts said asset quality for ICICI was likely to improve with the bank focusing more on stable and secured loans such as auto, mortgage and infrastructure financing, instead of unsecured loans such as personal loans and credit cards.
Brokerage Motilal Oswal said provisioning for bad loans at State Bank and ICICI was likely to be high in the last quarter due to the central bank's target to raise the minimum provision ratio for bad debts to 70 percent from 10 percent by September 2010.
However, conservative lending and an improvement in the economy and business confidence could mean the number of loan defaults would increase less rapidlyin the near future.
At State Bank, which with associates controls a quarter of Indian bank loans and deposits, focus will be on its loan growth and overseas plans. It said in September it was looking at acquisitions for up to $1 billion in Britain.
The bank is eyeing foreign acquisitions to boost its overseas profit contributions from about 10 percent.
Analysts said that while ICICI was expected to report a steady net interest margin, a key measure of efficiency, in the December quarter, State Bank should see an improvement as it increases low-cost deposits and cuts high-cost term deposits.
However, a fall in treasury incomes will weigh on profits at both banks due to a near-50 bps increase in the yield on the benchmark 10-year bond in the quarter.
In the year ago period, the benchmark bond yield fell sharply, boosting bank profits.
According to StarMine SmartEstimates, which predict future earnings by putting more weight on recent forecasts of top-rated analysts, State Bank's earnings per share are likely to show a positive surprise of 2.5 percent versus the mean forecast for the year to March.
State Bank shares rose 3 percent in the December quarter, in line with the sector index. ICICI fell 3 percent.
Bureau Report
First Published: Monday, January 25, 2010, 14:18