Banks’ earnings in the first quarter of 2017-18 are likely to remain broadly unchanged from the previous quarter as they continue to provide for bad loans and see limited uptick in net interest income (NII), analysts said. In a recent report, brokerage Kotak Institutional Equities said banks’ revenues are likely to grow at around 10% year-on-year (y-o-y). Net interest income is also seen growing at a similar pace. Kotak expects treasury income to improve from Q4FY17 and offset some of the losses arising out of provisioning. Morgan Stanley expects core earnings to be subdued for corporate lenders due to the combined effect of muted NII and higher provisions.
“We expect capital progression and provisioning outlook to be the focus,” the investment bank said in a note dated July 9, adding that retail banks should perform better and lending by non-banking financial companies (NBFCs) to the cash economy should report improving trends. Kotak expects retail-oriented banks to perform better. “Performance of private banks is expected to be weak with a 2% y-o-y growth, led by Axis Bank with a 26% y-o-y decline and ICICI Bank with a 12% y-o-y decline in earnings,” it said.
Margins are expected to come under some pressure, with the outflow of some of the current account savings account (CASA) deposits that came in during demonetisation and repricing of loans under the marginal cost of funds-based lending rate (MCLR) regime.
Provisions will also take a toll. After the March quarter results, State Bank of India (SBI) chairman Arundhati Bhattacharya had said, “Going forward, again as I said in FY18, the issue will remain that credit cost will remain elevated because we are still trying to do certain amount of resolutions. So in the near-term, there will be a downward pressure because of this.”
The outlook for slippages is somewhat better, with both broking houses predicting a downward trend for fresh bad loans in the corporate segment. Kotak wrote that there has been a “notable decline” in the special mention account-2 (SMA-2) portfolio as of March.
At the same time, some bankers have pointed out that the March quarter was typically a strong one for loan recoveries and the trend observed in that quarter may not continue.
After announcing Axis Bank’s Q4FY17 results, chief financial officer Jairam Sridharan had said, “We should recognise that Q4 does tend to be seasonally fairly strong for recoveries, etc. So I wouldn’t blindly extrapolate all the outcomes of Q4 into the next year. We are cautiously optimistic about the outlook on credit as we look at FY18.”
The impact of some M&A transactions, such as those involving Essar Oil and Jaiprakash Associates, as well as that of provisions against the 12 large accounts referred for resolution under the Insolvency and Bankruptcy Code will be closely watched, Kotak said.
Despite the likelihood of lower corporate slippages, Morgan Stanley expects credit costs for banks to remain high on account of slippages in rural areas arising out of microfinance institutions, seasonal factors and the impact of farm loan waivers in a number of states. “Key to watch would be defaults from segments not eligible for farm loan waiver,” it said.