Most public sector banks are anticipating a much slower growth in net profit in the fourth quarter of 2006-07. A year-on-year increase of 10 per cent in net profit is expected as higher provisioning, particularly on standard loans to sensitive sectors such as real estate and capital market, would negate most of the gain on account of expansion of loan portfolios.
The Reserve Bank of India had doubled the provisioning requirement on standard loans to capital market, real estate, personal loans and credit card receivables to 2 per cent in its third quarter review.
Banks would be required to make an additional provisioning of Rs 2,500 crore (Rs 25 billion) on loans to sensitive sectors, totalling around Rs 250,000 crore (Rs 2,500 billion).
"Whereas earlier we would have estimated a profit of at least Rs 300 crore (Rs 3 billion), the revised estimate stands at over Rs 300 crore. Doubling of the provisioning will make a Rs 40 crore (Rs 400 million) difference to the bank's bottom line," said the chairman of a mid-sized public sector bank (PSB).
Banks, under the aegis of the Indian Banks' Association (IBA) had asked for a phased implementation of the additional provisioning requirement.
However, the central bank noted that relaxing the rigour of additional provisioning would be neither prudent nor send the right signals in the current monetary environment.
Even with the RBI agreeing to pay interest on the cash balances banks are required to maintain with it to meet the cash reserve requirements, bankers envisage a shortfall.
"Additional provisions would mean a hit of Rs 50-60 crore (Rs 500-600 million) on an average per bank. The RBI's decision to pay interest on CRR balances would mean an inflow of Rs 20-30 crore (Rs 200-300 million) per bank. So that would mean a gap of about Rs 30 crore," said the executive director of another PSB.
Over the first three quarters of the year, PSBs have clocked a net profit growth of around 20 per cent. However, profit figures for the concluding quarter are not expected to be as robust, even though volumes have increased. A south-based mid-sized bank expects its net profit to be just over Rs 300 crore for the whole year, after reporting a profit of Rs 270 crore (Rs 2.7 billion) in the first nine months.
"There could be a slight decline in profits. Banks will have to somehow try and maintain a level above last year. A 10 per cent growth rate would be a substantial amount and a reasonable increase over last year," said a senior official of a large PSB.
Bankers are also worried about depreciation losses on their investment portfolios, with yields on government papers rising across maturities by 37-42 basis points and a volatile capital market, since the end of December.
"Profits will be impacted to some extent owing to depreciation losses. Banks have taken this into account and would not have substantially increased their portfolio in the last quarter," said a senior PSB official.
Banks that have transferred less than 50 per cent of their portfolio to the held-to-maturity (HTM) category are likely to book mark-to-market losses, said a PSB official.
Also, banks forced to raise deposits at continuously higher rates, to meet credit demand and shore up balance sheet numbers will report lower spreads. Despite raising their prime lending rates by 50-75 basis points, banks find it difficult to re-price existing loans contracted at fixed rates.
"The last quarter performance could have been much better. But even as the cost has gone up by 50-75 basis points, the yield (on loans) has not kept pace, going up by 30-40 basis points," said a senior PSB official.
