I expect the earnings of the major banks to grow at 20.5% in Q2FY2008. The net interest margin (NIM) is expected to remain under pressure (analyzed in detail later). However the fee income and treasury gains are likely to keep the non-interest component robust. I expect the core operating profit to grow at 28.5% driven by an improvement in the net core income and lower operating costs. However, provisions are expected to remain mixed with some banks likely to report higher provisions due to their asset mix (banks with higher retail exposure are likely to report higher provisions in line with the previous quarter).
I expect the NIM to remain under pressure for most public sector banks, however, the NIM for all the three leading private sector banks ICICI Bank, HDFC Bank and Axis Bank is likely to remain stable or report some marginal improvement due to the availability of higher float funds during Q2FY2008 after their recent round of capital raising. For banks like State Bank of India (SBI) and Punjab National Bank (PNB), I expect the NIM to remain under pressure (details provided later). Again, some banks may opt (not compulsory for banks) to deduct their investment amortisation expenses from the interest income from Q2FY2008 onwards as suggested by the Reserve Bank of India (RBI). Currently, the banks are adjusting the same through their other income, hence the readjustment.
Although the investment amortisation would not affect the earnings, it is likely to affect banks' NIMs based on the composition of their investment portfolio and amount of amortisation expenses. The core non-interest income component is likely to be steady driven by the fee income growth. However, the total non-interest income component is likely to get a boost from higher treasury gains likely to be reported during the quarter due to a decline in the benchmark yields in the bond market.
The operating expenses are expected to remain stable with some minor one-off items likely to be reported by Axis Bank due to its re-branding exercise undertaken. With a higher net income growth and stable operating expenses, I expect a robust 28.5% yoy increase in the core operating profits during Q2FY2008. Total provisions are also expected to be mixed for Q2FY2008. With the benchmark yields likely to decline sequentially, I do not expect any major marked-to-market investment depreciation on the statutory liquidity ratio (SLR) portfolio of banks.
However, after the subprime crisis, global yields have shot up significantly and among Indian banks only ICICI Bank has some exposure to foreign collateralised debt obligation papers. Hence I expect ICICI Bank to report higher MTM provisions on its non-SLR portfolio. Loan-loss provisions in absolute terms are likely to remain stable on a sequential basis but show a significant rise on a year-on-year (y-o-y) basis. Many credit rating agencies have also been voicing their concerns on the increase in defaults on the personal loan portfolios of banks.
Key Highlights & Expectations:
- ICICI Bank: Float funds available with the bank after the follow-on offer should help it in improving the NIM marginally, however low domestic credit demand and increased CRR requirements could offset the positives from the float funds. The non-interest income growth will remain steady; however, provisions may remain high due to higher marked-to-market provisions on non-SLR portfolio. I have assumed that the bank would provide around Rs 150 crore on its non-SLR portfolio during the quarter. Any improvement in yields going forward would result in lower provisions and improvement in the profitability.
- Axis Bank: The bank is expected to show best earnings growth among the private banks. Axis Bank's NIM is expected to benefit marginally from the float funds available after the combined GDR and domestic placements. The operating expenses are expected to remain high, as the bank has been hiring aggressively. Some one-time expenses related to re-branding exercise are expected.
- SBI: I expect the NIM to decline sequentially by 8 basis points. Better money market yields after the ceiling on the reverse repo amount was abolished should help the bank to negate some of the pressure on the NIM from higher cost of deposits.
- BOI: The bank is expected to show best earnings growth among the public sector banks. The NIM is likely to decline marginally, however the bank is expected to report robust non-interest earnings driven by higher treasury gains due to the stake sale of IL&FS Investments Managers for a profit of around Rs 40-42 crore.
- PNB: I expect the net interest income growth to remain weak and the NIM to decline by 7 basis points sequentially. The staff expense component and the provision charges could significantly alter PNB's reported results compared with our expectations. In Q1FY2008 PNB had provided Rs 200 crore towards transitional shortfall as per revised AS-15 guidelines and had indicated that another Rs 700 crore would be adjusted during the current fiscal. I have assumed that whatever excess needs to be provided over and above the existing costs would be equally spread among the remaining three quarters. Hence, the treatment by the bank for these incremental expenses contrary to our expectations could materially alter the results.
- BOB: I expect the NIM to show a marginal decline of 2-3 basis points. I have also not factored in any treasury gains from the second round of stake sale in National Stock Exchange by the bank. However, the overall treasury profits are expected to remain buoyant driven by normal trading gains.
