Banks’ earnings for the October-December quarter are likely to be weak due to a lack of recovery in loan growth, hikes in base rates, muted returns on investments and higher provisions for bad loans, Kotak Institutional Equities said in a report on Monday.
“There is a fair degree of uncertainty on provisions as RBI is quickening the pace for recognizing bad loans in large corporates, but we see banks giving their rationale which if not accepted will result in higher provisions and pain that overpowers the gradual recovery in the broader economy,” Kotak said.
Tepid demand for loans will limit revenue growth for banks and non-banking financial institutions (NBFC).
However, since NBFCs borrow from banks to in turn lend to their customers, lower base rates would help them improve their net interest margin (NIM).
The brokerage expects revenue to grow at an average of 9% year-on-year across the sector, with private banks’ revenue seen rising 14%. Net interest income (NII) for the sector is seen rising 8%, with NII of private banks likely to increase by 15% and that of public-sector banks is expected to increase 4%.
As most banks cut their base rates last quarter by 25-30 basis points, their NIM is expected to come under pressure. Kotak said that it expected the full impact of those rate cuts to be reflected in the current quarter. “However, we do believe that the decline in cost of deposits that most banks had undertaken a few quarters back should be able to offset the recent cuts,” the brokerage said.
Due to a noticeable slowdown in fresh investments, loans to corporate clients have fallen significantly. As a result, banks with balance sheets dominated by corporate assets are seen struggling. Also, many of already-restructured loans are now completing their moratorium period, which either implies an increase in the pace of repayment of existing loans, or a rise in slippages.
“We think most retail-oriented banks should be well positioned to deliver better growth trends,” Kotak said. Banks like Axis Bank and ICICI Bank are seen reporting strong performance in their retail operations, primarily due to an increased focus on the retail portfolio and a larger share of retail loans in its loan book.
The December quarter is also expected to see a rise in provisions as the Reserve Bank of India (RBI) is attempting to recognize numerous problematic assets in the books of banks. “Recognition in the current quarter or the next could result in huge pain on earnings, but gives clarity on the painful portfolio, while higher contingent provisions eases the pain on earnings,” Kotak said.
Banks are unlikely to have pressed companies to sell any of their non-core assets, and they would have continued restructuring loans through the 5:25 scheme and strategic debt restructuring. They are also expected to report new lines of credit extended through the Joint Lenders’ Forum (JLF) to companies seeking funds under the correction action plan.