Whilst the 2QFY14 results of the financial services sector were better than what we feared, it was still a weak quarter, with loan growth
slowdown, some margin compression, increase in NPAs and MTM hits on investment portfolios. Management commentaries and guidance
were subdued on loan growth and asset quality for the rest of FY14.
Despite the RBI’s actions to tighten liquidity in mid-July, the overall banking system was able to protect its margins (2.96% vs 2.99% in
1QFY14) during this turbulent period by increased pricing of loans and/or better balance sheet management. However, asset quality deterioration continued, with both private and public sector banks showing a QoQ increase in stressed assets (8.0% vs 7.7% at 1QFY14). Corporate loans continued to add to the stressed assets of the banks but retail asset quality was stable. Most of the banks used the RBI relaxation to transfer securities from the AFS category to the HTM category and saved themselves from huge MTM hits. However, most banks chose to amortise the MTM hits, barring some private sector banks.
