Mid-cap banks Q3 seen strong but outlook worrisome

Mid-cap banks are likely to report another strong quarter of healthy profits in Oct-Dec on robust credit growth, but stressed liquidity in a rising interest rate environment could obstruct growth going forward.

Higher loan growth, better margin and abating concerns over asset quality, following a strong economic revival, will help earnings in the fiscal third-quarter, analysts said.

Demand for loans in Asia's third-largest economy, which the International Monetary Fund has forecast would expand 9.7 percent in 2010, is expected to remain strong in the coming quarters.

On a year-on-year basis, margins will remain strong. Private banks should do well as compared to public-sector banks in terms of profit growth, Manish Ostwal, sector analyst at KR Choksey, said over the phone.

Margin compression impact (for private banks) will be much lower because they have high amount of CASA (current and savings account balances). They have significant presence in retail market where the pricing is much better in current environment.

Eight of the twelve banks whose estimates were polled by Reuters are expected to post double-digit profit growth for Oct-Dec compared to the same period a year ago while net interest income was also seen soaring.

The exceptions in the poll are UCO Bank, Jammu & Kashmir Bank and Indian Bank which are seen posting a profit fall while Union Bank is likely to post a 5.5 percent growth in profit.

Bank credit in India increased 24.4 percent on year as of Dec. 31, according to the central bank's data. Deposits were up 16.5 percent from a year earlier.

Deposit growth, a current concern because of the cash crunch and loan growth, may accelerate in the Jan-March quarter as interest rates become attractive, brokerage Motilal Oswal said.

Loan growth is likely to remain strong led by improved sales and higher inflation, leading to higher working capital requirements, a drawdown of sanctions made to the infrastructure sector and better business confidence, leading to higher investment-related growth, the brokerage added.

The BSE Banking Index, an index of bank stocks fell about 4.6 percent during the December-quarter, while the broader market gained over 2 percent.

INFLATION

Inflation accelerated in December on costlier food items, cementing expectations for another rate increase by the Reserve Bank later this month to cool spiralling prices.

The wholesale price index (WPI) , India's main inflation gauge, rose an annual 8.43 percent in December compared with an expected 8.35 percent rise in a Reuters poll and above 7.48 percent in November.

Most banks are likely to have witnessed stable credit growth during the quarter, but avoiding a margin squeeze in a high-rate environment will be the biggest near-term challenge, analysts said.

In this quarter, banks will see some amount of decline in NIMs, up to 5-8 basis points, said Vaibhav Agrawal, an analyst with Angel Broking.

Agrawal said rising interest rates in a high-inflation scenario is the single biggest challenge for small and mid-cap Indian banks.

Going forward, starting in the first quarter of 2012,...I think there is a 40-60 basis point decline in the NIMs for the small banks. he added.

India's annual industrial output in November grew at its slowest in 18 months at 2.7 percent, way below the 11.3 percent annual growth in the previous month and under the median forecast of 6.6 percent in a Reuters poll.