Higher provision requirement towards bad loans and weak credit growth are likely to weigh heavily on banks when they begin announcing first quarter earnings in this financial year. The results season for Q1 FY18 kicks off from Tuesday with IndusInd Bank and South Indian Bank leading the announcement.
Provisions may witness a slight uptick after the Reserve Bank of India identified 12 accounts in June and pushed banks to refer them to bankrupcty proceedings. These 12 accounts constitute a total of one-fourth of bad loans or non-performing assets (NPAs) in the sector.
Positive trends on asset quality will continue with the pace of slippages into NPAs declining from the previous quarter for nearly all banks.
Analysts say that demand for loans from large corporates still remains weak and the growth is still lower from pre-demonetisation levels. Further, recognition of more NPAs and capital to be set aside as provisions towards them will continue to haunt the banks, especially most public sector banks, hitting their profitability.
"Credit costs will remain elevated for most banks due to their large corporate exposure, mostly public sector banks due to the 12 accounts to be taken up under the Insolvency and Bankruptcy Code. Absolute slippages will be lower than the March quarter and also business growth has remained tepid around 6 percent," said Siddharth Purohit, Senior Banking Analyst with Angel Broking.
Kotak Institutional Equities said in a note last week, "A broadly similar performance to 4QFY17 is expected though better treasury income and NII (net interest income) growth would help offset a high provision requirement for bad loans.
“We expect volatility in NPA recognition across banks as a few large corporate exposures are likely to slip while we wait to see the impact of RBI's new provisioning norms on cases referred to NCLT (National Company Law Tribunal), which is not too material in our view," it said.
Most public sector banks and large corporate focused private lenders such as ICICI and Axis Bank may see some burden of the stressed loans.
A Kotak report predicts just a 2 percent year-on-year growth for private sector banks mainly because of a 26 percent decline by Axis Bank and a 12 percent drop in ICICI Bank's earnings.
Large discrepancies were seen in banks including ICICI bank, and Axis Bank and a smaller number for Yes Bank and RBL Bank in disclosures of NPAs between RBI's and the banks' own classification in March 2016.
In addition, the RBI has asked banks to provide for the troubled telecom sector which may have a bearing on profits.
However, there could be some respite from the much troubled Jaypee Associates’ deal with UltraTech Cements. Jaypee Group’s large debt hurt a few banks in the fourth quarter due to increased provisions for banks such as State Bank of India, ICICI Bank, Axis Bank, Yes Bank and IndusInd Bank.
ICICI Bank’s NPAs in Q4 rose significantly due to exposure of Rs 5,378 crore to Jaypee Associates, while Axis bank has Rs 1,660 crore and Yes Bank had Rs 911 crore, respectively.
Yes Bank and IndusInd disclosed their provisions made towards their accounts at Rs 228 crore and Rs 122 crore, respectively.
On credit growth, despite a marginal improvement in the credit growth for the banking system at around 6 percent in June end, from 4-5 percent a quarter ago, it is much below 9-10 percent levels seen pre-demonetisation.
“Credit growth is impacted by subdued demand for credit among the large corporate borrowers, discom loan conversion under Uday scheme and slowdown in credit off-take post demonetisation, the Kotak report said.
Retail growth continued to grow at around 14 percent, even if it is lower than 17-19 percent growth before demonetisation.