PREVIEW-Rate rises may weigh on India banks after strong Q2

* What: Sept qtr results from State Bank, ICICI, HDFC Bank

* When: HDFC Bank (Tuesday), ICICI (tbc), State Bank (tbc)

* HDFC net seen up 33 pct, SBI up 22 pct, ICICI up 12 pct

* Rising interest rates could play spoilsport with growth

By Sumeet Chatterjee

MUMBAI, Oct 18 (BestGrowthStock) – Leading Indian banks are set to
report quarterly profit grew by up to a third, helped by
robust
credit growth and rising fee income, and that rising interest
rates pose a challenge.

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.

“The credit growth in the sector will continue to move up
in tandem with the economic activity and that will support the
profitability of the banks,” said K.K. Mital, head of portfolio
management services at Globe Capital.

“But interest rate hike concerns will hover over the banks
in the near future as inflation continues to remain high.”

State Bank of India (SBI.BO: ), the country’s top lender, and
rivals ICICI Bank (ICBK.BO: ) and HDFC Bank (HDBK.BO: ) are seeing
an improvement in asset quality on strong revival in business
and consumer confidence in India.

Bank credit in India increased an annual 19 percent as at
end-September, according to the central bank’s data, from a low
9.7 percent in October last year and compared with 16.7 percent
at end-March.

The central bank sees non-food credit growth of banks at 20
percent in 2010/11, still a far cry from growth rates of above
30 percent in the pre-crisis period.

Brokerage Motilal Oswal said strong factory output growth,
order backlog of engineering companies, investment on
infrastructure projects and increase in demand for consumer
finance would boost loan growth in this fiscal year.

INFLATION THREAT

However, rising interest rates are a concern as they may
put the brakes on the rapid loan demand growth, especially from
retail borrowers, and thereby weigh on the profitability of
banks. India’s banks make the bulk of their profits through
pure banking activities.

The central bank has raised key policy rates five times by
a total of 125 basis points since mid-March and expectations
for another hike have strengthened after the inflation rate
rose an annual 8.62 percent in September, above the central
bank’s comfort zone. [ID:nSGE69E0B9]

A majority of investors expect the Reserve Bank of India to
raise rates by a quarter of a percentage point by the end of
2010 to curb inflation expectations, and once more by the end
of the fiscal year in March.

Banks such as ICICI and HDFC should report a reduction in
bad loans in the September quarter with the pickup in
industrial output growth and strong consumer sentiment,
analysts said.

The 10-yr benchmark bond yield (IN078020G=CC: ) rose 30 basis
points in the quarter, which may result in a drop in treasury
gains from a year earlier for banks that are required to hold
at least 25 percent of their deposits in government securities.

Bond yields move inversely to prices. The year-ago profits
of the top banks were boosted by treasury income thanks to
140-basis-point drop in yields.

The Basel III proposals are unlikely to impact the finances
of Indian banks compared to their global peers and they will
not need recapitalisation, analysts said, while capital
strength would return to dominate Q3 European bank results.
[ID:nLDE69D0M7]

Shares of State Bank of India, which the market values at
more than $45 billion, are up 41 percent so far this year and
HDFC Bank’s are up 42 percent. ICICI has risen 28 percent,
while the main market (.BSESN: ) has climbed about 16 percent.

Following are forecasts from a Reuters poll of analysts.

NET PROFIT NET INTEREST INCOME P/B Date

(bln rupees and mean pct change/yr)
State Bank 30.29 22 76.85 37 2.3
NA
ICICI 11.69 12 20.85 2 2.2
NA
HDFC Bank 9.14 33 25.16 29 4.1 Oct
19

Poll contributors: Religare, JM Financial, Unicon, MSFL,
Morgan Stanley, Motilal Oswal, IDFC, Kotak, Edelweiss, Enam,
HSBC, ICICI Direct, RBS, and Citigroup.
($1=44.3 rupees)
(Editing by Ranjit Gangadharan and Muralikumar Anantharaman)

PREVIEW-Rate rises may weigh on India banks after strong Q2