Business growth has been declining: After three quarters of robust business growth, the fourth quarter of FY2009 witnessed significant cooling in the credit offtake. As per the latest data by RBI, the credit growth as on March 13, 2009 stood at 18.3%, down from the ~24% growth for Q3FY2009 and the ~22% growth in the fourth quarter a year ago. Clearly, the moderation in economic activity and the deterioration in business and consumer sentiment are finally catching up with the demand for credit. Meanwhile, the deposits continued to grow at a healthy rate.

Margins under pressure: The net interest margin for most of the banks is likely to come under pressure as the impact of the PLR cuts would outweigh the benefit of the lower cost of funds. During the second half of FY2009, many banks had lowered their PLR by ~200 basis points (75 basis points in Q3FY2009) following aggressive cuts in the key rates by the RBI. Since the end of Q3FY2009, the bond yields have hardened: The ten-year G-Sec yield is up ~175 basis points and the five-year G-Sec yield is up ~135 basis points. This implies a relatively weaker outlook for treasury gains in Q4FY2009, after the robust treasury profits in the previous quarter.

Already the Q3FY2009 results have started to reflect the deterioration in asset quality. For Q4FY2009, while the deterioration in the asset quality is likely to continue, the revised restructuring norms may keep the pace contained in the reported numbers. In addition to the rise at the gross level, the recent clarification issued by the RBI regarding the treatment of floating provisions is expected to push up the net NPA for some of the banks under our coverage. For the quarter ended March 31, 2009, according to my estimates, Bank of Baroda, Punjab National Bank, and HDFC Bank would outperform their peers.