HDFC Bank is set for a quarterly profit rise of 30 percent on strong fee-based income, but most Indian bank results will be little changed as treasury provisions and a squeeze on lending margins offset loan growth.
Demand for loans will remain robust in the coming quarters, as companies expand their operations to feed strong demand for consumer goods and houses in Asia's third-largest economy.
However, rising bond yields will have a negative impact on state run bank earnings this time, and will continue to impact results of many state-run banks in the year to March 2007. This is because the resulting fall in the value of their big holdings of government bonds will force them to make provisions for the notional losses, Motilal Oswal Securities said in a report.
India's central bank is expected raise rates further next week.
Government-run State Bank of India, the country's biggest lender, could post flat fourth quarter to end-March earnings after it redeemed an expatriate deposit scheme for about $5 billion that drained cash and pushed costs higher, analysts said.
The bank will also miss out on some tax refunds that contributed 3 billion rupees - or 28 percent of net profit - in the same period last year, while a 30 basis point rise in bond yields will require the bank to raise its provisioning.
SBI's net profit for the fiscal fourth-quarter ended March 31 could rise just 0.7 percent to 10.72 billion rupees ($237 million), a Reuters poll of 10 brokerages showed. It has not yet set a date for the result.
India's central bank is expected to raise its key short-term interest rate by 0.25 percentage point to 5.75 percent on Tuesday, when it releases its annual monetary policy statement, a Reuters poll showed.
It could be the fifth increase since October 2004. A similar rise in January led banks to lift deposit rates by as much as 1.5 percentage points to attract investors as they compete with funds investing in the booming stock market.
Lending rates also went up by an equal measure, but the increase lagged by more than a month the deposit rate rise, putting pressure on banks' profit margins, analysts said.
"We expect earnings of banks to be lower than our initial estimates, largely owing to sharp increase in funding costs seen in the last two months due to short-term liquidity pressures," Rajeev Varma of DSP Merrill Lynch said in a report.
Sohini Andani, analyst at ASK Raymond James said, "the quarter was characterised by robust loan growth and liquidity crunch". Central bank data showed loans grew 30 percent in the past quarter.
Investor concern was reflected in the BSE's Bankex index that rose 3.6 percent in the past quarter, way below the 20 percent gain in the benchmark BSE index.
India's banking sector is dominated by state-run lenders, which control nearly three-fourths of the industry but are seen as less savvy than private sector banks, and dependent on normal loans for most of their earnings.
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