Mumbai: Banks are likely to report healthy first quarter earnings with reasonable loan growth, stable margins, strong treasury gains and continued decline in bad loans for the fifth quarter in a row. However, challenges on the deposit growth front for the system persist, hence the credit-deposit ratios are expected to rise.
Credit costs are expected to moderate for corporate-heavy banks such as ICICI Bank, Axis Bank and State Bank of India. The government bond yields have corrected by 53 basis points quarter-on-quarter (QoQ) to around 6.9 per cent and this could lead to higher treasury gains, especially for public sector banks.
Banks non-performing asset ratios have been on a downtrend, led by contained corporate slippages, heavy write-offs amid a slowdown in resolutions via the NCLT. FY2019 was the first year where the gross and net non-performing loan (NPL) ratios declined in a decade. Incremental stress visibility is more company-specific as compared to sector-related issues in the past.
Analysts hold a positive view on banks that are getting out of the corporate NPL cycle as compared to banks that focused more on the retail cycle in the past few years.
“We expect banks to report healthy net interest income (NII) growth at 16 per cent year-on-year (YoY) and 6 per cent QoQ, 22 per cent YoY for private banks and 10 per cent YoY for PSBs with stable to positive trend on margins, driven by reasonable credit growth of 14 per cent YoY…and lagged benefit from the MCLR transition. Overall, we expect healthy profitability growth at 14 per cent YoY for our coverage universe,” said Anand Dama, Analyst at brokerage Emkay Global.
Since January to June this year, the Reserve Bank of India has cut the policy repo rate by 75 basis points but banks have been slow in passing on this benefit to borrowers in a bid to improve their profit margins.
The agri-book stress is likely to remain elevated due to the still weak monsoon and the lagged effect of loan waivers, which could hurt some state-owned lenders and even HDFC Bank. On the same lines, the stress in SME loans, too, is likely to remain high. Within the corporate book, the key large stressed loans include Jet Airways, DHFL, Reliance Home Finance and Reliance Commercial Finance, Essel Group, Sintex Industries, Mcleod Russel, Eveready Industries, Cox & Kings and some real-estate developers. Banks may recognise some of these stressed loans in Q1FY20 (April-June), while a majority of the loans could possibly slip in Q2FY20 (July-Sept), if not resolved.
“Among private banks, we expect HDFC Bank, ICICI, Federal Bank, City Union Bank, Bandhan and small finance banks such as Equitas, Ujjivan and AU Small Finance Bank to report continued strong performance. IndusInd Bank will report merged financials and should recover from subdued Q4 with the IL&FS drag being behind it. Yes Bank is likely to report another weak quarter,” added Dama.
“SBI will continue to lead the PSB pack in terms of growth and other operating metrics. It, too, stands to gain from the normalisation of loan loss provisions after elevated provisions in Q4, especially towards Essar and falling bond yields. Private banks are expected to grow ahead of the system with sustained market share gains,” said MB Mahesh, Analyst at HDFC Securities.