Q3 to be a mixed bag for lenders

Lower margins, higher loan growth seen

Third quarter ( Q3FY21) earnings for banks are expected to be a mixed bag this season. While credit flow and collection efficiency could slightly improve quarter- on- quarter ( QoQ), driven by a bounce back in the retail sector and sustained momentum in agriculture, the asset quality recognition could be delayed again by a quarter due to the Supreme Court’s impending decision on loan recast. Hence, gross non- performing asset ( GNPA) ratios might be a tad better QoQ, with lenders reporting asset quality adjusted for the SC verdict. Other income may dip sequentially due to lower treasury gains and fee income.

The Supreme Court in its order last year had banned banks from marking defaulted loans as non- performing assets ( NPAs). The apex court had earlier directed banks not to recognise fresh NPAs, till further orders in the interest on interest case. A public interest litigation ( PIL) was earlier filed in the Supreme Court to waive off interest on interest for borrowers during the March to August moratorium period.

Provisional data released by private banks showed slight improvement in loan growth sequentially during the December quarter compared to the September quarter. According to analysts, large banks are likely to report better credit growth. The country's largest private sector lender, HDFC Bank, reported a loan growth of 16 per cent for the quarter ended December 2020. In a BSE filing, HDFC Bank said, its advances aggregated to about Rs 10.82 lakh crore as of December 31, a growth of around 16 per cent. The total loans and advances for Yes Bank grew by 1.8 per cent to Rs 1.69 lakh crore.

“For our banks, we see better QoQ loan growth of 2 per cent versus one per cent in the last quarter, although net interest margin ( NIM) may contract by 10 basis points to 3.4 per cent due to the flow through impact of lower deposit rates. Provisioning could remain elevated as banks might be conservative on future recognition. Consequently, net profit may decline by 17 per cent QoQ to Rs 9,280 crore,” said Gaurav Jani, analyst, Centrum Broking.

Motilal Oswal Institutional Equities said, “higher credit costs, coupled with suppressed credit growth, are likely to put pressure on near- term earnings. Although slippages are likely to increase in 2HFY21, we expect heavyweights like Kotak Mahindra Bank/ HDFC Bank to post a PAT growth of 20 per cent/ 11 per cent year on year. We expect net profit for IndusInd Bank/ Federal Bank/ Axis Bank/ ICICI Bank to decline by 56 per cent/ 20 per cent/ 15 per cent/ 14 per cent year on year.”

“PSU Banks are expected to deliver NII/ PAT growth of 2.8 per cent/ around18 per cent year on year, led by Bank of Baroda, which is expected to report a profit in 3Q.” it added.

Sharekhan said, “even though overall credit growth has been weak on system levels, at 5 per cent over the previous year, larger and well placed banks such as HDFC Bank, ICICI, SBI are expected to report better advances growth.”