The Hindu Business Line : Banks' profits for Q3 may remain buoyant

Quarter prospects
Most retail deposit accretions are taking place in savings accounts.
Large cash recoveries of non-performing assets
Banks have booked large profits in treasury operations as ten-year yields moved down.

Bangalore , Dec. 15

The hike in the cash reserve ratio (CRR) notwithstanding, banks' profits for the third quarter of this financial year are expected to remain buoyant on the back of improved net interest margins (NIM).

Bankers said that NIM for most of the banks was likely to be in excess of three per cent. This was despite the deposit rate hike by some of the banks and high costs of raising tier two capital.

Some of the large public sector and private sector banks had tweaked their deposit rates for raising medium term funds instead of short-term funds.

Many banks have also contained acceptance of bulk deposits, to avert possible liquidity mismatches.

Bulk deposits that cost 8 per cent were no longer seen as profitable in view of the short tenure. Such deposits were mostly deployed in 91-day Treasury bills (T-Bills).

With yields on T-bills remaining ranged 6.65 per cent for almost five weeks in a row this quarter, effective returns from such investments were negative. A 50 basis points increase in CRR has put further pressure on the returns.

Faced with this kind of a deficit, a banker said, "We would prefer to have bulk deposits for at least one year." This is because a one-year deposit allows for deployment of the funds in longer dated assets, including credit.

Savings accounts

Bankers also said that most retail deposit accretions were taking place in savings accounts. At least, 50 per cent of the banks deposits' mix came from savings accounts. This ensured that the weighted average cost of funds remained well under control and allowed for parking in long-term assets, including credit.

The increased costs have also been largely neutralised by increased yields on credit that moved up to over 11 per cent from about 10 per cent in Q2, since most of it were floating or had reset clauses. As a result bankers said the industry average yield on assets, that included both investments and advances, was upwards of 8.5 per cent, neutralising the increased cost of liabilities.

Besides, bankers said that during the last two months, many of them have also booked large profits in treasury operations as ten-year yields moved down to hit a low 7.41 per cent. Accordingly, many of the banks that had picked up securities in early Q3 at yields of 7.65 per cent had booked the gains made during the period.

Limited impact

Although yields have firmed by over 20 basis points over the last one weekend, the depreciation impact was expected to be limited to just less than 10 per cent of their G-Sec investment portfolio, which are marked to market. Almost the entire category of securities mandated as part of the statutory liquidity ratio fell in the Held to Maturity category, bankers said.

In addition, many banks had also made large cash recoveries of non-performing assets and rehabilitated their substandard assets.

In the case of the doubtful and loss assets, the recoveries implied that almost the interest recoveries would be part of the profit and loss account. The principal portion of the recovery would become part of the capital reserve. The write bank of the provisions in these cases would also help bolster the Q3 results, the bankers added.