India outlook: Trouble ahead
Thursday, February 26, 2009
On Feb. 24, Standard & Poor's sniffed at all the extra borrowing, which has raised India's total deficit to about 12% of its gross domestic product, and revised the country's outlook downward to negative from stable.Indian Banks are in trouble..earnings will fall sharply. The Banks have been running like mad to raise long term fixed rate funds...some of them have been successful...now rates are falling and they are stuck paying 10 to 12% on long term deposits...however, variable rate loans and mortgages are resetting at much lower rates than anticipated a year ago...this interest rate gap will squeeze interest margins and lead to sharply lower earnings. The PSU banks took their 'windfall' gain on bond holdings in previous quarters...these gains are unlikely to recur and margins are falling fast.
Expect a 25 to 40% fall in earnings over the next 12 to 18 months!!
2 Post Comments:
HELLO SIR,
This is the first time i have come across ur blog..nice to see a person like you who is having so much of industry experience ..i have started my career recently and trying to learn things around. i am looking forward to learn from you.
Regarding ur view on banks:: I agree with you point that banks will be under pressure going forward..You said that banks are chasing long term fixed rate deposits on which thy ll have to suffer as interest rates have gone down. But the other side of the coin is that thy ll earn more interest on the loans thy have given at a high interest rate..Banks always have to manage their both sides assets as well as liabilities..if they are raising money from 3 years FD then proportionately thy have to give loans for similar duration..thz wat u called asset liability management.. u r right deposits have gone up..Thz why There was a drop of 200-300 bps cut in CASA in most of the banks but this will not effect bottomline by 25-30%. Most of the PSU banks will grow by more than 20% which will be the driver for better numbers.
The main problem going forward for the banks would be NPAs....average NPAs for PSU Banks for dec quarter were 1.2-1.5%. If these number increases more than 3% then we can expect 25-30% cut in earnings .. The story of gain on investments is still not over completely for all the banks.. The banks like bank of india and union bank still have to realize their total investment portfolio gains...
So i think, the main issue would be NPAs going forward.
Thz my view ..please gimme ur inputs on that ..
Rajat
Indian banks have built up a mis-match...fixed rate term liabilities are MORE than fixed rate term assets...they are increasing punitive measures should customers try to get out of term assets...as rates decline the net interest margin is shrinking...trouble ahead.
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