Indian Banks

ICICI Bank, the country’s largest private sector bank, on Friday said its standalone net profit for the quarter ended June expanded 30 per cent at Rs 1,332 crore from Rs 1,026 crore a year earlier.

Higher interest income, driven by growth in advances and lower provisions on the back of improving asset quality, aided the bank’s earnings during the quarter.

On a consolidated basis, profit after tax grew 53 per cent year-on-year to Rs 1,667 crore.

ICICI Bank shares rose 3.3 per cent to touch an intra-day high of Rs 1,051 on the National Stock Exchange (NSE) as investors took comfort from the management’s outlook on asset quality, margin and credit growth. The shares ended at Rs 1,038.3, up 2.1 per cent from the previous close.

Net interest income, or the difference between interest income and interest expense, was at Rs 2,411 crore during the quarter, up 21 per cent from a year ago. Fee income increased 12 per cent year-on-year to Rs 1,578 crore in the past three months.

“We continue to improve the quality of our earnings and balance sheet. Our net interest margin was at 2.6 per cent during the quarter, which is an improvement of 10 basis points from a year ago. While the industry as a whole is expected to face headwinds on margins, we expect to maintain our net interest margin at the current level for this year,” Chanda Kochhar, managing director and chief executive officer, told reporters in her post earnings comments.In 2010-11 (April-March), the net interest margin of the bank was also at 2.6 per cent.

Improving asset quality helped the bank cut its provisions by 43 per cent from a year ago to Rs 454 crore during the three months. Net non-performing assets decreased 33 per cent to Rs 2,351 crore during this period. Net bad loan ratio fell to 0.91 per cent as of June 30 from 1.62 per cent a year ago.

“Our total provisions have gone down even though we made additional provisions as per the Reserve Bank of India norms. We are not seeing stress on any specific sectors,” Kochhar said.

“The pressure on small and medium enterprises (SMEs) will be more than larger companies going forward. So, we will watch this portfolio more closely. So far we are comfortable with our SME portfolio,” she said.Total restructured assets of the bank were at Rs 1,950 crore as of June-end. The loan loss coverage ratio was at 76.9 per cent.

Advances grew 20 per cent from a year ago to Rs 220,693 crore. On sequential basis also the bank expanded its loan book by two per cent. About 37 per cent of the bank’s advances were retail loans, while 23 per cent were domestic corporate loans. International loan book accounted for 25 per cent of the total portfolio and mainly comprised of corporate advances.

Share of unsecured loans narrowed to 2.1 per cent as of June-end from three per cent a year ago. “We are very selectively expanding our unsecured book and offering products only to clients who have long standing relationship with us,” Kochhar said.

Deposits also expanded 15 per cent to Rs 230,678 crore. Share of low-cost current account savings account (CASA) deposits were at 41.9 per cent of total deposits.

Kochhar said the bank aims to grow its advances by 18-20 per cent and deposits by 20 per cent in the current financial year. It aims to maintain CASA ratio at 40 per cent in coming quarters, she said.

ICICI Bank closed first quarter with a capital adequacy ratio of 19.57 per cent. Tier I capital adequacy ratio was at 13.36 per cent.

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HDFC is expected to raise rates by 25-50 basis points, since it kept its lending rates unchanged since May.

Brace yourselves to shell out more for home loan instalments. A couple of days after the Reserve Bank of India raised key policy rates by 50 basis points, housing finance companies (HFCs) like Housing Development Finance Corporation (HDFC), LIC Housing Finance, and Dewan Housing Finance are set to make their home loans more expensive.

According to the officials at some of these companies, the extent of the rise would at least 50 basis points.

 HDFC, for instance, is likely to raise its home loan rates from August 1, industry sources said. It is expected the country’s largest mortgage lender would raise rates by 25-50 basis points, since it kept its lending rates unchanged since May.

Earlier this week in a column for Business Standard, HDFC Vice-Chairman and chief executive Keki Mistry said, “Clearly, at this juncture, RBI remains steadfast in its single key objective of anchoring inflationary expectations. However, the 50-basis point increase does seem sharp. While rates will obviously tread higher as a result of today’s measures, one must reiterate that the demand for home loans would continue.”

HDFC had, last raised its retail prime lending rate by 50 basis points on May 16. The lender currently charges 10.25 per cent for home loans up to Rs 30 lakh, 10.50 per cent for loans between Rs 30-75 lakh and 11 per cent for loans above Rs 75 lakh.

LIC Housing Finance, the second-largest housing finance company in the country, is likely to pass on the entire rise to its customers. “We would take a call on the interest rate in a couple of days when the asset-liability committee meets. However, having said that, whatever is the increase (in our borrowing cost), it is likely to be passed,” said LIC Housing Finance chief executive VK Sharma.

According to industry estimates, total mortgage advances in the country during 2010-11 is expected to rise 30 per cent to around Rs 1.5 lakh crore from Rs 1.15 lakh crore in 2009-10. While banks account for 70 per cent of these loans, HFCs command the remaining portion of the pie.

On Tuesday, RBI, in its quarterly monetary policy, raised the repo rate, or the rate at which it lends to commercial banks, by 50 basis points to eight per cent. The reverse repo rate, or the rate at which RBI borrows money from commercial banks, was also raised by the same margin to seven per cent.

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Banks are in a hurry to increase their lending rates after the Reserve Bank of India (RBI) on Tuesday raised the repo rate, at which it lends to banks, by 50 basis points to eight per cent. Deposits rates are also set to go up but at a slower pace compared to lending rates, bankers said.

“Interest rates will go up…very quickly,” HDFC Bank Managing Director Aditya Puri said.

Even RBI Governor D Subbarao said banks had told him rate rises would be “more rapid than in the past”.

In fact, private sector YES Bank increased its lending rates by 50 basis points from on Tuesday. The bank’s base rate, or the minimum lending rate, is now revised to 10.25 per cent, while its benchmark prime lending rate has been raised to 19.5 per cent.

“Banks will swiftly transmit this (policy) rate increase to the real economy via increased borrowing and lending rates,” said Citi India Chief Executive Officer Pramit Jhaveri.

High lending rates have also cast a shadow on banks’ credit expansion plans for this year. RBI on Tuesday revised its credit growth target for the industry to 18 per cent for 2011-12 from the earlier 19 per cent.

Base rates of 47 major banks in India, which account for 98 per cent of bank credit in the country, have increased by 50-125 basis points in the past few months. Credit growth for the industry so far has been around 20 per cent from a year ago.

“If you look at year-to-date numbers, credit growth is negative since March. Therefore, going forward, while the expectation of credit growth will be 18 per cent, one has to wait and see if there is credit demand. The demand till now is coming from existing projects, which are under implementations. But new projects are not being taken up. So, credit growth is expected to be muted,” said M D Mallya, chairman and managing director of Bank of Baroda.

The increase in lending rate hikes will be accompanied by hike in deposit rates. According to bankers, the rates are likely to rise more for short-term maturities than for deposits with longer tenure.

“In deposits, banks will have an issue in competing with others. on Tuesday, insurance companies and mutual funds are also competing in the same space. We have liquid funds giving a rate of 8.50-8.75 per cent. If we keep our rates low, we will be bypassed for deposits,” said Pratip Chaudhuri, chairman of State Bank of India, the country’s biggest lender.

Most bankers, however, said they would be more aggressive in raising rates on their loans than deposits to protect their interest margin.

“If loan rates go up, deposit rates will go up…Fundamentally, for Basel III banks will require more equity and lesser amount of Tier II capital. When you need equity, you obviously should have the ability to service it,” HDFC Bank’s Puri said.

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While industry chambers give a thumbs-down, saying growth will be hit.

Union finance minister Pranab Mukherjee on Tuesday backed the Reserve Bank of India’s aggressive policy action, saying the central bank had sought to give a strong signal to further moderate inflation and check inflationary expectations.

However, industry chambers slammed RBI’s action on a 50-basis point rise in the repo (short-term lending) rate.

With RBI’s action, the finance minister said he expected inflation to fall in the range of six to seven per cent by the end of 2011-12, from the current 9.44 per cent. He said while food inflation had softened in recent months, non-food inflation had hardened.

The Confederation of Indian Industry (CII) said with 11 consecutive interest rate increases in 15 months, RBI had emerged as the most aggressive central bank tasked with containing inflation. CII director general Chandrajit Banerjee said it was imperative that non-monetary measures were rapidly deployed to deal with supply-side issues, which continue to contribute to inflationary pressures.

The Federation of Indian Chambers of Commerce and Industry (Ficci) said RBI’s move was a major disappointment to industry. Ficci secretary general Rajiv Kumar also asked the government to have a hard look at supply-side constraints to lessen RBI’s burden in controlling inflation.

The finance minister said despite the slowing in industrial growth and moderation in the expansion of interest-sensitive sectors, the overall momentum in GDP growth for 2011-12 was in line with the momentum attained in 2010-11. Meaning, economic growth would be close to the 8.5 per cent recorded last year. This is higher than RBI’s own projection of eight per cent growth for 2011-12.

But, the chambers were again not impressed. CII said, “At a time when all available data indicate a clear slowdown in industrial and economic growth, this (RBI’s action) is a matter of great concern, since there could be a tipping point beyond which salvaging a downward spiral of growth could be an arduous task.”

In this situation, a more than expected increase in the repo rate would also hurt sentiments, the chamber said. Ficci said: “With the growth momentum already under pressure, the RBI step will further hurt future prospects.”

“Even the projected growth rate of eight per cent for 2011-12 now looks difficult to achieve,” said Rajiv Kumar.

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Higher lending rates and tight liquidity conditions would continue to hit the demand for loans, resulting in a further slowing of growth in bank credit, the Reserve Bank of India (RBI) said in its macro-economic and monetary development report on Monday.

In the first quarter of this financial year, bank advances rose 20 per cent, compared with 22 per cent in the year-ago period, mainly on account of a rise in lending rates and a high base effect.

RBI said a slowdown in credit was evident, primarily for public sector banks. Foreign banks, that had cut lending during the crisis significantly increased it. In the quarter ended June, credit flow from foreign banks rose 17 per cent, compared with 12 per cent in the same period a year ago.

Sectoral deployment data showed bank credit to the agricultural activities and services sector shrank 1.4 per cent and 0.9 per cent, respectively, while credit flow to industry and personal loans rose 2.9 per cent and 1.4 per cent.

A steady rise in policy rates since March 2010 led to a rise in lending rates, as well as deposit rates. As a result, the gap between credit growth and deposit growth narrowed from nine percentage points in mid-December to 5.6 percentage points in March and to 1.5 percentage points in July.

RBI said time deposits rose sharply, while demand deposits saw a decline following the increase in deposit rates. Broad money growth increased faster in the quarter ended June, even when reserve money growth decelerated.

Liquidity conditions turned to a deficit mode in April and remained so through the entire quarter. RBI said though usually there is liquidity surplus in April, this year it was the opposite, with banks borrowing Rs 19,000 crore daily, on an average. Government borrowing through cash management bills and additional borrowing through treasury bills, the average daily net liquidity injection under the repo window, increased to around Rs 55,000 crore in May and Rs 74,000 crore in June.

The RBI said overall monetary conditions remained in line with the policy stance in the quarter. Going ahead, liquidity conditions are expected to remain in a deficit mode for better transmission of monetary policy.

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The Reserve Bank of India (RBI) on Monday said volatility in local financial markets may return if the macro-economic situation deteriorates.

“If prolonged inflation feeds into inflationary expectations, it would affect all segments of the markets, particularly the G-sec (government securities) markets. A widening of the fiscal deficit, leading to higher-than-budgeted market borrowings, could also exert an upward pressure on G-sec yields,” the central bank said in its report on macroeconomic and monetary developments, released on Monday.

A slowdown in economic growth is likely to affect the earnings of companies, and this would weigh on equity markets. However, RBI said despite interest rates rising sharply in the past few months, there was no sign of stress on domestic financial markets. “The subdued market volatility is no guidance for the future. Financial market volatility can return if macro conditions worsen,” it warned.

 The banking regulator said the possibility of a delayed exit from monetary easing by advanced economies, the sovereign default risks in euro zone and the scope of rating downgrades for major economies may hit capital flows and financial markets in India.

While global financial markets remained tepid in the first three months of this financial year, asset price movements in India were broadly range-bound and orderly, despite the high inflation, tight liquidity and uncertainty in global markets.

The volatility in local share markets continued to decline in April-June period and the performance of Indian equity markets was better than that of other Bric nations (Brazil, Russia and China) during this period. Investments by foreign institutional investors in Indian equities also saw a rise towards the end of the last quarter.

The exchange rate remained flexible and saw less volatility, the central bank said.

Home unit prices and transaction volumes also increased in the January-March quarter. RBI said monetary transmission also strengthened, as rates hardened in the credit market after all scheduled commercial banks raised their base rates after a policy rate increase. Base rates, or the minimum lending rates of 47 major banks, with a share of 98 per cent of bank credit, rose 50-125 basis points. Deposit rates of 23 major banks, which account for 65 per cent of bank deposits, rose by 25-175 basis points. The rise in deposit rates was relatively sharper for maturities of up to one year.

“Short-term rates moved up further, but there were no signs of stress in money markets,” RBI said. This led to flattening of the yield curve. Transaction volumes in the CBLO (collateralised borrowing and lending obligations) and market repo segments were higher in the first three months of this financial year, compared to the preceding quarter.

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Indian companies’ dependence on non-bank funding sources is rising. This, even as banks continue to remain the dominant source of finance to the commercial sector, the Reserve Bank of India (RBI) said on Monday.

“Non-banking sources also contributed significantly to the credit requirements of the economy during the first quarter,” the central bank said in its report on macroeconomic and monetary developments in 2011-12, released here on Monday.

The share of non-bank sources to the total flow of financial resources increased to 49 per cent in the first three months of this financial year from 36 per cent in the year-ago period. Funding from non-banking channels, both in India and abroad, rose during this period.

The transmission of monetary policy actions has led to an increase in banks’ lending rates, prompting companies to explore fund-raising opportunities from non-bank sources. Base rates, or the minimum lending rates of 47 major banks, with a share of 98 per cent of bank credit, rose 50-125 basis points.

Fund flow from non-banking sources in the April-June period rose to Rs 116,488 crore from Rs 95,111 crore a year ago. Non-food bank credit from the beginning of this financial year to July 1 stood at Rs 123,180 crore, down 26.5 per cent year-on-year.

About 59 per cent of the funds raised from non-banking sources were mobilised from the domestic market. In the local market, fund raising through issuances of commercial papers swelled. Net issuances of commercial papers subscribed by non-banks were estimated at Rs 40,846 crore up to May.

Companies also raised funds from abroad through foreign direct investments and external commercial borrowings. Foreign direct investment to India till May surged 75.5 per cent, compared with a year earlier, to Rs 34,790 crore and had the largest share of foreign non-banking funding sources.

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Axis Bank has requested the Reserve Bank of India (RBI) for certain dispensations regarding its deal with Enam Securities.

RBI had given its in-principle approval for the deal but it also specified some conditions that are expected to increase the tax burden for Axis bank. As a result, the bank wrote to RBI, seeking “certain modifications” in the specified terms and conditions.

The terms and conditions specified by RBI included a revised scheme of accounting and a change in the eventual structure of the business proposed to be acquired.

According to sources, the bank was exploring different options to revise the deal structure without attracting an additional tax burden.

“Upon examining the implications of these conditions, the bank has sought certain modifications to the approval granted by RBI. Pending the receipt of the necessary approvals, no effect of the acquisition has been given to the financials for the quarter ended June 30, 2011,” the bank said in a statement.

Somnath Sengupta, executive director and chief financial officer, Axis Bank, declined to give further details on this issue. “I cannot give any more details than what is mentioned in the press release. RBI had stipulated some changes and we want to make some modifications there. It is difficult to put a timeline and predict the outcome. We hope things would happen sooner rather than later,” he said.

Sengupta clarified the delay in closing the deal had so far not affected the businesses of either Axis Bank or Enam Securities.

The country’s third-largest private sector bank has already missed its first cut-off date to close the transaction. In November, 2010 while announcing the deal, Axis Bank’s managing director and chief executive officer Shikha Sharma said the transaction was likely to be completed in four to six months.

Earlier, RBI had stalled Axis Bank’s plan to induct Vallabh Bhansali, co-founder and chairman of Enam, as independent director on the bank’s board.

Axis Bank had said Enam would de-merge its equities and investment banking businesses into a wholly-owned subsidiary of Axis Bank. The bank would also de-merge its investment banking business into this subsidiary.

Shareholders of Enam would get 5.7 shares of Axis Bank for every share held in the broking company. In other words, Enam shareholders would get 3.3 per cent stake in the bank on enlarged capital.

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