Earnings of banks in the second half of FY15-16 were marred by asset quality review (AQR)-related stress addition and provisioning. According to a report from Motilal Oswal Securities, banks are expected to report better Quarter-on-Quarter (Q-o-Q) earnings in the June 2016 quarter. However, for state-owned banks’ net profit growth is expected to be disappointing. Increased activity on monetization of non-core assets, reduction in cost of funds and bond gains are likely to support earnings, the report cites. Net interest margins (NIMs) are expected to remain stable Q-o-Q. The Indian government’s focus on fiscal discipline and addressing policy roadblocks, the central banks help to address stress issues in the system as well as banks’ intense efforts on recoveries and deleveraging of corporate balance sheets are a positive for banks and should reflect in their financials.
Improving auto and commercial vehicle sales, higher cement dispatches, RBI’s consumer confidence survey, and higher activity in stalled projects, point toward a gradual recovery. The moderate demand environment is likely to result in 10-11% Y-o-Y deposit and loan growth in in the June 2016 quarter. Saddled with NPAs, state-owned banks’ growth is likely to fall short of the industry average led by capital conservation efforts and weak corporate loan growth of ~3% YoY as of May 2016. Private banks’ growth should remain healthy at ~18%, helped by strong retail growth, especially auto and commercial vehicle loans and refinancing.
Core revenue growth is likely to remain muted Y-o-Y, led by moderate balance sheet growth, declining margins Y-o-Y and moderate income fee growth. The brokerage firm expects private banks to continue to outperform state-owned banks. Apart from continued asset quality stress, weak expectations and the focus on balance sheet health would drive banks to make high provisions, which could impact earnings. Over the past year, Indian banks (mainly state-owned) have sold assets worth approximately Rs600 billion to asset reconstruction companies (ARCs). Write-downs and the resultant provisioning for the same (as per the RBI’s guidelines) would begin over the coming quarters.
The brokerage firm expects yields to decline Q-o-Q, hence profit on sale of investments to support earnings. Over the June 2016 quarter, yields remained largely stable; however, volatility was high, which will benefit trading income. Banks are expected to shift part of their portfolios from held-to-maturity (HTM) to available-for-sale (AFS) in the September 2016 quarter. To provide for balance sheet stress, banks are likely to monetize strategic investments, repatriate profit on foreign operations and book trading gains on the sale of HTM security in open market operations (OMOs) of banks.
Though there may be a sharp fall in NIMs as compared to a year ago, NIMs should remain stable Q-o-Q. Mostly because banks have largely refrained from cutting the base rate in the March 2016 quarter, which would support loan yields. Along with this cost of deposits has continued to fall. While there are positive factors at play for NIMs, intense competition in the refinancing business and retail loans is likely to keep incremental lending yields under pressure.
Gross stress addition is likely to remain elevated Y-o-Y, however, it is expected to moderate sharply as compared in the March 2016 quarter. High stress addition in the quarter will be led by a) seasonal factors b) lagged impact of the RBI’s AQR c) banks proactively classifying certain assets based on inherent weakness in the account, and d) non-fund-based exposures of some corporates turning into NPAs, cites the report. Banks have significantly increased efforts on the recovery front, which should provide some respite on headline GNPAs.
Similarly, asset quality stress is likely to be elevated compared to a year ago, but is expected to decline sharply Q-o-Q. RBI’s tough stance on the clean-up of balance sheets by March 2017 would weigh on banks’ asset quality. However, following the clean-up exercise taken by banks, the stress is expected to come down sharply Q-o-Q.