India Outlook: Trouble Ahead For Banks

India headed to Junk Status?

On Feb. 24, Standard & Poor’s sniffed at all the extra borrowing, which has raised India’s total deficit to about 12% of its gross domestic product, and revised the country’s outlook downward to negative from stable.

Indian Banks are in trouble, and earnings will fall sharply.  The Banks have been running like mad to raise long term fixed rate funds. Some of them have been successful, but now rates are falling and they are stuck paying 10 to 12% on long term deposits. However, variable rate loans and mortgages are resetting at much lower rates than anticipated a year ago, and this interest rate gap will squeeze interest margins and lead to sharply lower earnings.  The PSU banks took their ‘windfall’ gain on bond holdings in previous quarters. These gains are unlikely to recur and margins are falling fast.

Expect a 25 to 40% fall in earnings over the next 12 to 18 months!!

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