>BANKING SECTOR REVIEW (ANAGRAM)

Banks reported a robust yearly growth in Q4FY09, though sequentially situation worsened,

Slowdown in the lending activities from the last two quarters coupled with lower interest rate scenario translated in to a negative growth in Net Interest Income in most of the banks quarterly basis. Moreover, hit of asset quality could be very clearly seen in gross NPA figures. We are Bearish on Banking Sector due to the following major concerns.

• Adverse effect of downturn in core business in Net Interest Income
• Hit on asset quality following the economic downturn
• Inadequate cover for NPAs
• Stress on demand Deposit
• Banks still in a diverse track of business

PRESSURE ON NET INTEREST INCOME
The cautious strategy adopted by most of the banks discouraged lending activites, putting pressure on the interest income and the margins. Lower interest income, while on the other side continued flow of deposits kept the interest expenses on a high end. As a result of which most of the banks registered degrowth in net interest income on sequential basis, consequently drop in the margins.

WORRY ON ASSET QUALITY
Banks had hard hit on their asset quality following the ongoing financial slowdown and that is the reason of choosing the safe avenues for the fund deployment by the banks instead of providing credit to the productive sectors. To deal with it, RBI came out with the circular of restructuring without changing its investment grade.

INADEQUATELY PROVIDED FOR NPAs
Provision coverage ratio provides the cushion for the corrosion in the asset quality. Presently where all banks prefer capital conversation and risk management over growth, those who have adequately provided for the NPAs are on a safer side. In FY 2008-09 instead of providing more amount for the same, some of the banks lowered their provisions and thus showed positive sum of growth in Net Profit.

To see full report: BANKING SECTOR REVIEW