Higher pro­vi­sions, weak loan growth to mar bank earn­ings

Financial Chronicle - - COMPANIES, MONEY & MARKETS - FALAKNAAZ SYED

THE bank­ing sec­tor is ex­pected to re­port yet an­other quar­ter of sub­dued per­for­mance on both rev­enue and prof­itabil­ity fronts. The sec­tor would re­main un­der stress on ac­count of el­e­vated pro­vi­sion­ing, weak loan growth, de­cline in net in­ter­est in­come (NIM) quar­ter on quar­ter (QoQ) and lower trea­sury gains. How­ever, there could be a se­quen­tial de­cline in slip­pages across all ma­jor banks, along with in­vest­ment gains from sale of stake in sub­sidiaries--by SBI and ICICI Bank.

Sys­temic credit growth has re­mained anaemic and re­main at multi-year lows and was 6.8 per cent in the fort­night to Septem­ber 15. Year-to-date growth in loan book stood at -1.3 per cent, which in­di­cates muted growth in bank loan books dur­ing the first half of this fis­cal (1HFY18), es­pe­cially for cor­po­rate-fo­cused public and pri­vate sec­tor banks.

Fur­ther, de­posit growth re­mained higher, led by mas­sive in­flow of de­posit dur­ing the de­mon­eti­sa­tion drive. Lend­ing rate fell sharply on the back of liq­uid­ity over­hang, which re­sulted in mod­er­a­tion in net in­ter­est mar­gins (NIMs). “Ad­justed for State Bank of In­dia (SBI), we ex­pect our bank­ing uni­verse to re­port mod­est growth in both non­in­ter­est in­come and loans. The trend in fee in­come growth is set to re­main muted; a favourable yield move­ment dur­ing the quar­ter, how­ever, will see banks re­port de­cent trea­sury gains (though on a lower side QoQ),” said Aalok Shah of Cen­trum Eq­uity Re­search.

Dur­ing the sec­ond quar­ter, both top banks SBI and ICICI Bank sold a part of the stake in their in­sur­ance sub­sidiary. “These in­vest­ment gains will be utilised to­wards cre­ation of con­tin­gent pro­vi­sions,” said Shah.

Slip­pages for Cen­trum cov­er­age uni­verse are set to mod­er­ate or de­cline QoQ; how­ever fol­low­ing lower re­cov­ery, over­all gross non­per­form­ing as­sets (GNPA) are ex­pected to re­main at el­e­vated lev­els on both YoY and QoQ bases. Pro­vi­sions will re­main higher as banks pro­vide for NPA age­ing, and reg­u­la­tory re­quire­ment to­wards cer­tain stressed ac­counts, in ad­di­tion to stan­dard as­set pro­vi­sions.

Ac­cord­ing to Crisil Re­search, the eco­nomic value of as­sets un­der­ly­ing NPAs is erod­ing with time–res­o­lu­tions are hard to come by and banks would do well to bite the bul­let and step up on pro­vi­sion­ing, mainly for large cor­po­rate NPAs, and thus, fa­cil­i­tate a faster cleanup of their bal­ance sheets.

The rat­ing agency es­ti­mates that banks would need to set aside close to Rs 3.3 lakh crore this fis­cal, or 50 per cent more than the Rs 2.2 lakh crore they pro­vided for last fis­cal. The pro­vi­sion­ing quan­tum was ar­rived at after an ac­count-by-ac­count anal­y­sis of the eco­nomic value of as­sets un­der­ly­ing large cor­po­rate NPAs.

The anal­y­sis also showed that po­ten­tial write-downs could be in the 25 per cent to 75 per cent range. While some of the NPA ac­counts have been ad­e­quately pro­vided for, the ma­jor­ity of them will re­quire higher pro­vi­sion­ing com­pared with cur­rent lev­els, based on the resid­ual eco­nomic value of the as­sets. This, Crisil es­ti­mates, could lead to a net loss of around Rs 60,000 crore for the bank­ing sec­tor this fis­cal, with public sec­tor banks (PSBs) bear­ing the brunt of in­crease in pro­vi­sions and the re­sul­tant im­pact on prof­itabil­ity be­cause of their higher stock of NPAs.

The as­sess­ment also as­sumes ef­fec­tive res­o­lu­tion of stressed as­sets this fis­cal. Any de­lay would ex­tend the pain on prof­itabil­ity into the next fis­cal, too. “Pres­sure on the earn­ings pro­files of banks would re­duce from next fis­cal if banks in­crease pro­vi­sion­ing on large cor­po­rate NPAs this fis­cal,” said Kr­ish­nan Si­tara­man, se­nior di­rec­tor, rat­ings at Crisil.

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