Amidst the rising concerns at the macro level, the business growth at the industry level remained strong in Q3FY2009. The year-till-date credit growth (till December 19, 2008) stands at 24.4%, better than the ~22.0% credit growth recorded in the same period last year. The healthy credit demand is primarily due to the fact that alternative funding sources (external commercial borrowings, foreign currency convertible bonds) have dried up with rising risk aversion. Though the role of domestic banks has increased, the credit growth is still expected to moderate going forward on the back of the economic slowdown.

Net interest margins for most of the banks are likely to remain stable as the aggressive cuts in reserve requirements (CRR cut by 400 basis points, including the 50-basis-point cut effective January 17, 2009) would help offset the cuts in the prime lending rates (PLRs; of 50-75 basis points effective in Q3FY2009).

The bond yields continued their declining trend during Q3FY2009 and have come off by ~300 basis points since Q2FY2009. Consequently, banks are likely to write back the marked-to-market provisions made during the first quarter of the current fiscal. The impact of this is likely to be more pronounced in case of the public sector banks (especially State Bank of India and Union Bank of India). However, the extent of the write-backs would depend on the changes in the composition of bank’s investment portfolio during the quarter and the timing of realisation of write-back benefit.

For the quarter ended December 31, 2008, Bank of India, Punjab National Bank and State Bank of India from the public sector and HDFC Bank from the private sector are expected to outperform. Meanwhile, ICICI Bank, HDFC and Allahabad Bank are likely to be among the underperformers.