What’s better than the Sensex at 19,000? Well. The Sensex at 25,000! The situation is similar when it comes to the results in the banking sector. Bumper profits last year have ignited hopes of strong results this year as well. This is despite the fact that growth in credit has slowed.
Early results from banks have not disappointed. Profits at private sector HDFC Bank and Axis Bank have risen an unprecedented 40% and 60%, respectively.
HDFC Bank’s rise in profits is more surprising as it comes on the back of a 34% rise in the first quarter. Moreover, the bank has posted a 45% rise in interest income at a time when banks are paying high rates for deposits and not getting enough customers owing to the high lending rates.
Axis Bank has benefited from a surge in non-interest income, or returns from selling insurance and mutual fund products.
banking analyst said, “Both these results are exceptional. HDFC Bank had been sluggish last year (FY07) but it has bounced back this year. Axis has always been doing well. And now with the busy season for loans kicking in, FY08 could be even better.”
Traditionally, the busy season starts with the festivals in October. Corporate India is also known to go into a borrowing overdrive in the last quarter, helping banks to accelerate loan growth and hence profits.
The growth in loan disbursals has been slow so far this year — at 21.9% compared with a 32% growth registered in the same period last year — as the Reserve Bank of India has stepped in with interest rate hikes to curb inflation.
Private sector banks have outperformed their public sector peers in terms of profits for the last few years. However, analysts said banking profits would be much better this year even if PSU banks continue record a modest 18-20% rise in profits.
Ashvin Parekh, partner and national leader, global financial services, Ernst & Young, expects public sector banks to continue the good work in this quarter. “Public sector banks will continue to do well, especially on the low-cost current account savings account (CASA) front. Banking margins will also get a lift because of treasury gains as international interest rates are moving southward after the recent US Federal Reserve interest rate cut.”
An analyst from a private brokerage firm is betting on public sector banks doing well due to treasury income.
“Public sector banks will see huge profits flowing in by way of their treasury income. On the core operations front, Union Bank of India and Bank of India will do well while OBC and Canara Bank may suffer. However, the banking sector as a whole looks positive.”
However, increasing bad loans are a worrying factor, especially for private sector banks.
High interest rates in retail loans have lead to some bad loans, which could take the wind out of the sector.