Poor asset quality will continue to dent banks’ books when they report their third quarter earnings numbers. PSU banks will report weak asset quality on the back of their exposure to troubled sectors, while for private banks the asset quality is likely to remain stable.
Moreover, the public sector banks’ share of restructured assets will be higher given their larger share in assets under recast in the corporate debt restructuring (CDR) cell.
A report by Bank of America Merrill Lynch (BofAML) points that though public sector banks will disappoint on asset quality, gross slippages may be down 10-15% thanks to greater focus on dealing with agriculture non-performing assets (NPAs).
The report adds that among the private banks, Axis Bank will be most troubled with slippages and restructuring numbers standing at R1,000-1,200 crore, led by restructuring.
The State Bank of India (SBI) should continue to stand out (on the negative side) with likely sharp rise in gross NPAs at about R4,000 crore and R6,000 crore of slippages, said a Morgan Stanley report.
Lower provisioning should boost the net profits of private banks, while PSU banks? earnings should remain subdued.
Analysts expect large private banks to post earnings growth of around 22.5% year-on-year (y-o-y), while public sector banks will grow at 2.5% y-o-y.
Among the public sector banks, Punjab National Bank and Canara Bank may disappoint on earnings, down 5% and 3% y-o-y, respectively, as asset quality issues persist. SBI?s net profit growth, at 6-8% y-o-y, will be driven by treasury gains, partly offset by higher credit costs (partly due to standard asset provisioning) that may hurt the bottom line. Bank of Baroda will see flattish growth and Bank of India will grow 7% y-o-y.
Among private banks, HDFC Bank’s bottom line is expected to grow 30% y-o-y again, thanks to strong credit growth.
ICICI Bank is expected to report earnings growth of 20-25% y-o-y, helped by gains booked on sale of stake in First source.
Kotak Mahindra Bank will show least growth in earnings among private banks on slower loan growth at around 13%, as management remains cautious and margins remain stable.
Analysts are expecting banks to report better loan growth owing to a festive pick up. Credit growth during the quarter is expected to be up by 16-17% from a year ago, for state-owned banks, thanks to secured retail lending and conscious reduction in project loans and working capital loans, according to the BofAML report.
Despite better loan growth, public sector banks are likely to report muted or lower net interest margins (NIMs) in the October-December quarter, since incremental lending was at much lower yields than last year.
?Margins may be down by 10-30 bps year-on-year, as incremental lending at much lower yields (10-11% compared with 11.5-12.5% last year,? said Rajeev Verma and Veekesh Gandhi, analysts with BofAML.
Kotak Institutional Equities, on the other hand, expects NIMs to fall by 15-20 basis points.
However, a fall in bulk deposit rates and lower slippages are likely to benefit select lenders like IndusInd Bank and Yes Bank, in terms of boosting NIMs, analysts reported.
