It seems that banks are getting into the over-valued territory.Banks make money from three main sources which i feel will see pressure going forward:
1. Interest Income - The spread (NIM) that the banks have enjoyed over the past one year due to a low interest rate regime that came into effect after the big crash is due to contract.When RBI cut rates the banks kept the lending rates at more or less similar levels and cut deposits rates drastically and hence enjoyed "free profits".This probably won't continue and the NIM will come down with RBI tightening the liquidity due to inflation.
The credit growth as released by RBI is nothing to talk home about.Even an optimistic 16-18% growth going forward (as opposed to an almost flat growth last year) does not warrant the optimism that we are seeing today.
2. Fee based non interest income - This is an indirect offshoot of credit growth and general actvity in the economy and will probably continue to be robust but this for most banks wont compesante for lower interest income.
3. Treasury gains - The 10 year G-Sec is pushing 8% and the treasury gains are going to turn to treasury losses as interest rates increase.
All these factors indicate that profit growth is going to be muted going forward from here. Although banks like HDFC bank, Axis Bank might do relatively well from a business point of view i am worried about the PSU and other lower rung banks that have run up like anything.Something like Syndicate Bank (an average performer) which has hardly performed is up some 25-30% in the last one month.I think its better to tone down expectations and avoid exposure to mediocre banks at these levels.
