Banking sector woes are expected to continue in the first quarter of the financial year with weak profits despite a pickup in retail-backed credit growth and easing of fresh bad loans.
Mid-sized private lender IndusInd Bank will kick-off the earnings season reporting its first-quarter results Tuesday. With no surprises, the bank is expected to post stable profits driven by healthy loan and interest income growth. Karnataka Bank will report its numbers Thursday, July 12.
“While the system-wide (loan) growth has picked up, a number of public sector banks (PSBs) have a constraint in lending and the space vacated by state-owned banks is likely to be filled by private banks... We expect the large private lenders to grow their advances in the range of 15-20 percent, except for a few PSBs other might see either flat or de-growth in their balance sheets,” said Siddharth Purohit, Research Analyst at SMC Institutional Equities.
The credit growth as per Reserve Bank of India (RBI) has improved for the system to 12.3 percent for the first two months of FY19 as compared to 9.8 percent growth seen in Q4FY18.
The gross non-performing assets (GNPAs) for the industry increased by Rs 1.38 lakh crore, from Rs 8.79 lakh crore to Rs 10.16 lakh crore in the fourth quarter of the last fiscal. About 85 percent of the addition came from PSU banks, the consequent provisions weakening their capital positions.
Further recognition of existing bad loans due to the RBI's February 12 circular and the rise in bond yields by 50 basis points (0.50 percentage points) will lead to higher provisions and continue to dent profits.
“While incremental NPA additions would cool off during the quarter, the aging-related provisions and elevated bond yields will keep provisions higher for most PSU banks. MTM (mark-to-market) losses in Q4FY18 were already elevated and it could remain high during Q1FY19 as well. And hence, we don’t expect improvement on the bottom-line front for public sector banks,” Purohit added.
On February 12 this year, the central bank released a new framework to tackle bad loans which mandated banks to classify stressed loans from the first day of default and coming up with a resolution plan within 180 days.
Better performance
Overall, the April to June quarter this year will be better than a year ago. Also, the trend of private sector banks, especially large ones, performing better than their public sector peers will continue.
“It will not be as bad as the last two quarters. For the large lenders, it will work out better than the previous quarter. The fourth quarter is cyclically better than Q1 usually. So compared to Q1 of last year, this quarter (Q1FY19) will be decent,” said Udit Kariwala, associate director at India Ratings and Research.
He also said large private banks, and State Bank of India (SBI) and Bank of Baroda should report better numbers with retail continuing to drive growth for the sector and a modest recovery in bad loans.
Punjab National Bank (PNB) will continue with its losses on the back of impact due to the Rs 14,000-crore fraud unearthed in February and loans in the insolvency process.
HDFC Bank will continue to be the outlier and report healthy profits due to stable loan growth and its insulation from large NPA cases. It will report its financial results on July 21.
On the other hand, ICICI Bank, which is due to post results on July 27, will continue to see some stress with a rise in NPAs with a stable loan growth.
According to a Kotak Institutional Equities report, SMA 1-2 (special mentioned accounts) data shows recognition or classification of bad loans as less of a concern for the sector while some large resolution in insolvency courts should give comfort.
SMA accounts are the potential NPA accounts which as per RBI’s revised guidelines banks must identify immediately on default depending upon the period of default starting day 1 to below 90 days. Post 90 days default, a loan account is recognised as an NPA.
NBFCs Q1 preview
NBFCs or the non-banking finance companies will continue to ride a strong growth trajectory in FY19 even as 1Q may be a bit subdued, in line with seasonal trends.
“Business momentum likely moderated in the 1Q post a strong 4Q in segments like commercial vehicle (CV) finance, so did recovery performance especially in rural finance… Most NBFCs continue to benefit from the decline in borrowing costs in FY2018,” the Kotak report said.
As a caveat, it said NBFCs will make a transition to Ind-AS accounting standards from this quarter and as such, the reported financials may not be directly comparable.
Even though it added, the NPAs seasonally rise during the first quarter and the impact on gross NPA ratio and net interest margins (NIMs) will likely be pronounced this year given a bar raised by the 90-day period NPA norms.
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