Banking sector overview for Q3FY12

The banking sector will continue to face pains in Q3 FY12. However, the private sector bank are more resilient as compared to the public sector banks in this respect.

Net Interest Margins (NIM) and deterioration of asset quality are the 2 key areas that one should watch out for. The slowing of credit growth is also an important factor that is going to affect the Q3 and Q4 FY12 numbers of banks.

The growth in the Net Interest Income (NII) of banks may not reflect good growth on the back of slowing credit growth and uninterrupted high deposits growth on account of attractive interest rates offered by the banks. As on Dec 16, 2011, credit growth grew by 17.1% versus the RBI's expectation of 18% (of FY12) on a YoY basis. Deposits grew by 18% versus the RBI's expectation of 16% for FY12 on a YoY basis. This was largely due to the slowing of growth in the economy. Now, the Finance Ministry has revised GDP growth for FY12 to 7.50%.

Banks have exposure to sectors like infrastructure, power, textiles, aviation and SME, where the companies are facing serious headwinds in terms of growth. We had seen a steep rise in Non-Performing Assets (NPAs) in the Sep quarter of FY12 for some banks, which was due to the movement of system-driven NPAs (Bank of India, Union Bank of India). We believe that in Q3FY12, banks may find it difficult to drive their NPAs lower. Most of the banks' NPAs would rise further or may remain subdued on a sequential basis. Also, those banks that have exposure to companies like GTL, Kingfisher Airline, K.S.Oil etc. may find higher slippages and provisions in this quarter.

The maintenance of Net Interest Margins (NIM) will remain a key concern for banks. In Q3 FY12, most of the banks' NIMs may lower on a YoY basis. This is on the back of a continuous rise in interest rates thought the year. In CY 2011, the RBI raised the interest rate (repo) 7 times, i.e. by 225 bps. In Dec 2011, the repo rate stood at 6.25%, while it currently stands at 8.50%.

In a rising interest rate environment, the deposit rate increases, which impels people to save more and results in a rise in the cost of borrowing for banks. On the other hand, people postpone taking loans, as a result of which, the competition among banks rise and they strive to extend loans at the cheapest rates possible.

With the softening of the govt. bond yield, banks may see a positive impact on their bond portfolio. They may show a rise in their MTM profits with respect to their investment in the bonds.

One should look out for the savings deposits of banks like Yes Bank, Kotak Mahindra Bank etc., which have raised their savings deposit rates as soon as it was deregulated by the RBI.

Investors should also expect to get clarity on the capital infusion to the respective banks. Recently, many banks have said they will receive funds from the govt. by FY12. However the govt's fiscal situation is not good either.

We believe  that this time too, private banking players will have an edge over the public sector banks. It seems that the prices of the banking space have factored in some of its pains. However, one must get a view on the capital infusion part; and watch out for the key ratios like NPAs and NIM, which will further give clarity on the respective banks. Their managements' view on these factors is crucial, and can help investors in picking up the good banking stocks. We will provide updates in this regard on our website. Also, it seems that the interest rate is at its peak, and the reverse movement of the rate in the coming quarters could trigger a positive for the sector.

The following is the list of some banks and the dates on which they are going to come out with their Q3 FY12 results: