In the current scenario – rising interest rates, asset quality deterioration and pension liability provisions – will remain an overhang on the financial performance of the banking sector.
Going forward, we expect front-loaded data-driven tightening of ~50 bps (i.e., fuel price hikes, sudden spikes in WPI) along with some liquidity management actions with CRR likely to be a preferred policy tool. We believe that the impact of rate hike is primarily going to be felt on the treasury gains and investment portfolios.
Pension liability to be a big overhang for PSU banks and old private sector banks. Reportedly, the total estimated liability of second option pension is ~Rs 210 bn which is over ~8% of FY10 PSU Banks’ net worth.
The recent negative news flow emanating from various sectors such as micro-finance, telecom (2G), real estate and diamond loans, along with corporate governance issues, have heightened fears that NPAs will become a big challenge for Indian banks if there is a serious level of default arising from these (or other) sectors.
