Strong quarterly profits set to be posted by Indian banks

Analysts are a view that Indian banks are expected to show a healthy rise in their quarterly net profit on higher earnings from loans due to a rise in interest rates and treasury gains as a result of a gain in bond prices.

For Oct-Dec a Reuters poll of analysts forecasted an average net profit rise of 23 percent for small and mid-cap banks. Private sector banks have been posting the highest rise.

"With the lending rates mostly remaining firm, the yields on advances should provide some fillip to the net interest margins on a sequential basis,'' Brokerage Sharekhan said in a report.

In 2007 banks raised interest rates by 200-250 basis points, after the Reserve Bank of India had raised the rates five times since June 2006 and tightened banks' reserve requirements through the year, limiting the availability of the funds for loans.

According to the poll forecast there is a rise of 82.6 percent in net profit for the quarter for Yes Bank and 60.07 percent rise for Centurion Bank of Punjab.

There was a fall in profit in some state-run banks. Allahabad Bank, which was expected to announce results on Wednesday, reported a 9.8 percent fall in profit, whereas there was a downfall in the profits of UCO Bank and Syndicate Bank also.

In early September the rules for foreign borrowings were tightened. The Indian banks are expecting to gain from this, as this will force firms to borrow from local lenders, but banks also feared about growing defaults after the central bank raised interest rates.

Analysts said in this quarter, they will be keeping a close watch on the provisioning by banks towards bad assets as it would determine the asset quality of banks.

"If the provisioning keeps going up, then there will be a concern on the quality of assets, especially the excess capacity that was created over the last few quarters," an analyst with a foreign brokerage said.

Analysts said the cost of funds diversified between 5 and 8 percent depending on the profile of deposits. They said the cost for banks with higher share of retail deposits will be lower.

According to analysts the non-interest income, i.e. mainly gains from treasury operations, is expected to go up as bond and equity markets have performed well in the quarter.

During the quarter there was a fall in 10-year bond yield from 7.90 to 7.79 percent, while the benchmark stock index rose 17 percent to 20,286.99.

Fee-based income will also be a major factor, especially for private banks, said an analyst with a Mumbai-based brokerage.

An analyst with a domestic brokerage said the asset quality would be good and the overall economic growth will support recovery from written-off assets.