Banks' Q4FY21 preview | Private banks may post healthy numbers; all eyes will be on asset quality

Like always, the Q4FY21 earnings of most banking players will show the hits and misses but the most significant part of their numbers will be the impact of COVID-19 on their asset quality.

When the banking players will start to release their March quarter scorecard in days to come, all eyes will be on their asset quality as after Supreme Court lifting its direction on nonperforming asset (NPA) recognition, a clearer picture of their asset quality in the wake of coronavirus pandemic will appear.

A favorable base of last year and lower provisioning requirement will boost earning numbers but earnings upgrades will depend on asset quality and business growth, brokerages point out.

"Nonperforming loan (NPL) recognition after four quarters and high recoveries from a few corporate resolutions and its impact on revenue and provisions would make Q4FY21 a noisy quarter for most banks," said Kotak Securities.

Kotak Securities underscored that there are two large deviations to normal trends on asset quality, which would result in this quarter showing high volatility to various line items.

"On the net interest income line, we see a higher level of one-off income recognition (due to NPL recovery) and income de-recognition (slippages recognised in this quarter on a cumulative basis for lenders who have
not done it previously)," said the brokerage firm.

Kotak expects volatile trends on provisions as lenders are likely to dip into the COVID-19 provisions made in earlier quarters and probably could choose to make higher provisions this quarter as well.

On asset quality, Kotak believes reported slippages would be quite elevated as this would be the first quarter of bad loan recognition with the Supreme Court lifting curbs on the same.

However, the brokerage firm expects lenders to report a not-so-worrying ratio given that the recent quarters have seen significant improvement in economic recovery.

"We expect overall NPL ratios to remain significantly lower than RBI projections considering that we have seen a significant recovery of bad loans from a few companies (steel and infrastructure). Lenders are likely to report a higher write-off as well," Kotak said.

As per brokerage firm Prabhudas Lilladher, key areas to watch out for will be lower treasury income and bond mark to market (MTM) loss, as G-Sec yields are up by 30-35bps quarter-on-quarter (QoQ).

Collection efficiency to continue being in focus especially in unsecured and micro-finance institutions (MFIs) as well as adjustments to net interest incomes (NIIs) and net interest margins (NIMs) on optical interest reversals will also be in focus, Prabhudas Lilladher said.

The brokerage firm expects a steady 15 percent YoY NII growth but strong 5 percent QoQ growth for private banks as the cost of funds still has been moving on the lower side helping NII growth be better than loan growth of 10 percent YoY and 4 percent QoQ.

Among the public sector banks, SBI should see strong earnings and operating performance due to favorable base on NII, a seasonally higher fee quarter and some recoveries from Bhushan Power, said Prabhudas Lilladher.

However, the brokerage added that a higher G-Sec MTM keeping provisions up and much lower treasury gain can spoil the party for SBI. But, slippages are likely to be under control.

For Bank of Baroda and Punjab National Bank, operating performance will look better but slower growth and impact of rising yields will also impact them, Prabhudas Lilladher said.

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