Banks' Profits To Accelerate On Economic Growth.............

Banks likely to report a reduction in bad loans with the pickup in industrial growth

Leading banks are set to post higher quarterly profits on strong corporate and retail loan demand, and a rebounding economy will bring down consumer defaults and improve their asset quality.State Bank of India, the country's top lender, and rivals ICICI Bank and HDFC Bank are seeing a pick-up in demand for loans on the back of improving business and consumer confidence in an economy forecast to grow about 8.5 per cent in 2010-11."We are seeing a revival in the capital expenditure cycle and the confidence level is rising," said Rakesh Rawal, head of private wealth management at Anand Rathi. "These will ensure that credit growth remains on the upswing."A rate hike by the Reserve Bank of India (RBI) earlier this month to counter double-digit inflation and expectations it will raise rates again at its scheduled policy on July 27 is unlikely to impact loan demand."The liquidity is going to be enough in the system. There may be an upward bias in interest rates but the rise is not going to be rampant," Rawal said. "The economic growth itself will create opportunities for the banking sector."Analysts said banks' loan growth in April-June, the fiscal first quarter, would have been helped by mobile carriers' scramble to secure funds to pay for 3G spectrum after winning an auction for high-speed radiowaves.The government had raised $14.3 billion from the auction, nearly double the target.

Lower Bond Yields

Bank credit in India grew an annual 21.70 per cent in early July, according to the RBI's data, in tune with a rise in business and consumer confidence, from a low 9.7 per cent last October and compared with 16.7 per cent at end-March.Brokerage Motilal Oswal said that revival in loan growth was likely due to higher capital requirements by corporates and increased investments on infrastructure such as roads and ports.The RBI sees non-food credit growth of banks at 20 per cent in 2010-11, still a far cry from growth rates of above 30 percent in the pre-crisis period.Banks are likely to report a reduction in bad loans with the pickup in industrial growth, but lenders such as government-run State Bank of India may raise the provision for such debts to meet a revised RBI directive.The 10-yr benchmark bond yield fell 30 basis points in the June quarter, which is likely to result in gains for banks that are required to hold at least 25 per cent of their deposits in government securities. Bond yields move inversely to bond prices.Shares of State Bank of India, which the market values at $33 billion, are up 7.5 per cent this year. ICICI and HDFC are up nearly 1 per cent and 21 per cent, respectively, while the main market has gained about 3 per cent.