Margins: Under pressure The RBI has raised the repo rate (125 bps in last 12 months) and CRR, both of which are currently around 9 per cent levels. These moves have increased the cost of funds for banks. Since interest rates on deposits have also moved up to 10 per cent (one-year deposits), the highest in nearly over five years, there are high chances of customers moving their surplus current and savings (CASA) deposits to fixed (term) deposits, thereby further increasing the cost of funds for banks. Analysts say that in a rising interest rate scenario, banks with a high CASA ratio are better placed vis-à-vis those with a lower CASA metric. That's because, CASA deposits attract low interest rates (interest on current account balance is nil, while on savings account it is 3.5 per cent per annum). They estimate that an increase of 100 basis points in CASA can improve NIMs by 10 basis points; as cost of CASA deposits remains constant even as lending rate charged to customers rises.
On the other hand, while the banks have resorted to hiking their respective prime lending rates (PLR), analysts expect the pressure (though not significant) on the NIMs to continue in Q2 FY09. Thereafter, NIMs could stablise and perhaps improve from Q1FY10. Some of this pressure could also be offset considering that some banks have increased their deposit rates by alower margin, and thus provide a surprise (beat estimates).
Asset quality & treasury income: Under stress? The other area of apprehension is the threat of rising NPAs, which though will vary depending on the portfolio quality of individual banks. Says an economist, "In any downturn, the asset quality tends to deteriorate. But, unlike in the past, the recovery systems for banks (including debt recovery tribunal, implementation of SARFESI Act, etc) are much stronger." Adds Tridib Pathak, CIO, Lotus AMC, "In a slowdown, NPAs can increase, which is a cyclical risk. But, are there signs of any secular deterioration? Certainly not!" Economists explain that defaults are largely seen in non-collateral areas (mainly retail) like credit cards, personal loans, etc. Out of the retail assets, which form about 25 per cent (average) of total advances, about 18 per cent comprises housing loans, which are backed by assets. And, the remaining seven per cent comprises of auto loans (backed by vehicle as a security), credit cards, personal loans, etc. Thus, in a worse case scenario, the defaults will be within manageable limits. On the other hand, with interest rates on the rise and a good chance of RBI hiking rates further, banks may have to provide for the fall in bond values (held in available for sale (AFS) category), thus impacting profits over the next one-two quarters. But, the same would get reversed (since it is abook entry) thereafter, as interest rates decline.
Growth rates: Seen slowing down Higher interest rates mean lower affordability and hence, are expected to lead to slower growth in retail and corporate advance, which is already happening. Banks, too, have deliberately put some brakes on providing credit to the retail segment to keep a tab on credit quality.
With access to foreign funds (ECB, etc) not coming easily, and equity markets in the doldrums, demand from corporate India has however been healthy. Says Tridib, "Due to various reasons (including the fall in stock markets), the corporate finance activities have improved. This is on account of critical projects, including infrastructure and capex, where demand for credit is unlike to wane." Thus, overall credit growth is expected to slow down from over 25 per cent currently to around 18-20 per cent. Regards the fee-income, this too is likely to slow down over the next few quarters but still remain healthy between 15-25 per cent. Nonetheless, the overall income and profit growth for the industry should be at a respectable 15-25 per cent.
The silver lining Even as the outlook for the next six months remains subdued led by rising costs, asset quality concerns and higher provisions, the sector's medium-to long-term prospects continue to look good. Explains Tridib, "If you look at the last 15 years, the NIMs of banks have averaged around 3 per cent, which is across interest rate cycles.
This is because banks are a classic 'passthrough' mechanism. If you look at the recent hikes, banks have passed on the cost increase through PLR hikes. So, any pressure on margins will be temporary and over a period margins will remain stable and possibly inch up." Adds Karwa, "Margins should not correct from current levels, and are likely to be maintained as banks are also increasing lending rates." So, while it may take time for the clouds to clear off completely, the sector (stocks) is expected to see range bound trading. For instance, if the RBI hikes repo rates or CRR further then expect banking stocks to be hit in the interim. Likewise, in the current situation, any further upside is unlikely. Meanwhile, watch out for any surprises that could come up in the form of significant losses on account of forex exposure (arising from exposure to credit derivatives, as yields have hardened in international markets) and, on account of asset quality and NIMs over the next two quarters. Any spike in prices of crude oil or commodities to recent peaks (low probability as per experts) could prove to be dampeners, and cast their ominous shadow on the prospects of the banking sector.
Thus, any downward swing in market sentiments could be used as an opportunity to selectively buy banking stocks. Experts prefer banks with high CASA ratio, strong management and good liability (loan) profile. Among preferred picks include Axis Bank, HDFC Bank, Union Bank of India, Indian Bank, Federal Bank, South Indian Bank, PNB, SBI and ICICI Bank.
REALTY Grappling with low demand "Some of the real estate players are land bank rich, but cash poor," said a CEO of a large Bangalore-based realty firm referring to the liquidity problems being faced by real estate players. While the real estate players The Smart Investor spoke to believe that the liquidity crunch and rising costs are a short-term phenomenon, analysts are of the view that the pain is going to last for at least two quarters if not more going ahead.
The rise in interest rates, the spike in input costs and drying up of funding options has led to adip in prices, drop in profit margins and slowdown in development of construction projects. The high three digit year-on-year growth in sales, EBIDTA and net profit registered in every quarter over the last few quarters is passé and this is reflected in the June quarter results of the companies that constitute the BSE Realty index. Though some of it is due to a high base, the slowdown in demand has had its impact with sales and profit margins registering lower double digit growth. Unless the situation related to the high cost of capital, input costs and most importantly demand changes for the better, the sector could see worse days over the next three months.
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CA. VIKAS KAPAHI
TREASURER
JAB WE MET CA
REDEFINING PROFESSIONALISM
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