Indian banks may report relatively weaker operating trends with the domestic slowdown and global concerns weighing on credit growth and asset quality, according to a report by Barclays Research. The net interest margins are likely to remain largely stable. However, fee income growth is likely to remain muted due to lower incremental sanctions and loan growth.

The Barclays report notes that there could be credit quality issues from large borrowers to start to become evident in these results, particularly in the restructured loans category. Restructuring activity in the CDR scheme has been high with several large borrowers having entered the CDR process. Additionally, the exposures to sensitive sectors will continue to see some pressure.

A difficult business environment has led to lower loan growth. As at 16 December 2011, loan growth had moderated to 17% y/y (as against 21% at the end of 2Q FY12), whereas deposit growth had moderated to ~18% (vs ~19% in 2Q FY12). The absolute amount of deposits fell by Rs351bn on a sequential basis. Margins are likely to be stable as the repricing of assets will largely be offset by an increase in cost of funds.Growth in fee income is likely to remain muted due to lower incremental sanctions and loan growth. For banks under our coverage, fee income growth has been moderate at 14% y/y for 2Q FY12. In light of the slowdown in economic and industrial activity, we expect fee income growth to be lower in 2H FY12.

Barclays expects the credit quality issues from large borrowers to start to become evident in these results, particularly in the restructured loans category. The amount of restructuring had already seen an increase with total debt pending restructuring under the Corporate Debt Restructuring (CDR) mechanism in 2Q FY12 at Rs264bn compared with Rs75bn in 1Q FY12 and Rs180bn in FY11.

Going forward, it expects it to increase further based on recent news flow on banks referring their debt to Kingfisher Airlines, Bharati Shipyard and others for the CDR process. Additionally, the SME and mid-corporate segments will remain under pressure due to the slowing economy and stress in some segments - particularly infrastructure, airlines, iron and steel and export-oriented industries.