>Indian Banking System: Q3/9M FY09-10: Performance Review & Outlook

The current ICRA research is an update on the performance of 43 Indian Banks during Q3 / 9M FY09-10. We have included 26 public sector banks and 17 private sector banks in the current analysis. These banks would account for over 90% of the Indian Banking System assets as on December 2009.

■ Overall profitability indicators have been maintained during the nine months ended December 2009 for the Indian Banking System with net profits as a percentage of average total assets at around 1.04%. Improving interest margins compensated for a decline in the non-interest revenues and rise in credit costs. Some downward pressure on overall profitability expected next year due to rise in credit provisions and adverse impact of likely rise in bond yields.

■ Sharper decline in the cost of funds compared to the yield on earning assets led to improvement in interest margin for most banks in Q3FY10 compared to the previous quarter. Interest margins likely to remain strong for next 2-4 months as banks reap benefit of reduction in deposit rates and expected rise in credit portfolio. Future interest margins will depend on impact of higher interest to be paid on savings deposits and impact of introduction of ―Base Rate‖ for lending from April 2010 and the systemic liquidity levels.

■ While credit growth has been muted in the current year, we are witnessing some traction since December 2009 and given the sizeable undisbursed sanctions, credit off-take expected to pick up from the current quarter.

■ NPA levels have risen in the current year leading to some deterioration in the reported asset quality and solvency indicators. ICRA expects gross NPA % to rise to 3.25-3.75% in next two years as compared to around 2.40% as on December 2009.

■ Expected rise in bond yields to adversely impact pre tax profits next year by 10-20%.

■ Capitalisation levels for the Indian Banking System is remains comfortable with overall capital adequacy of around 14% and Tier I of around 9.5% as on December 2009 though some specific banks (especially public sector banks) require equity capital to meet their business plans for the next two years.

■ Public Sector Banks will require capital of over Rs 1 trillion over next two years to maintain capital adequacy of 12% and meet business plans, while private sector banks are adequately capitalised for the time being though some of them will require capital to manage growth aspirations and also dilute the promoters’ holding to the levels required by the RBI.

To read the full report: INDIAN BANKING SYSTEM