The banking sector is likely to witness a 15% year-on-year decline in earnings during the July-September quarter, as it continues to reel under the effects of provisioning for bad loans, Kotak Institutional Equities said. The brokerage anticipates the decline in profitability even as it sees revenue growing 18% Y-o-Y, primarily driven largely by treasury income. Provisioning may rise 82% from the year-ago period. While the brokerage sees state-owned banks reporting lower slippages on a sequential basis, provisioning is expected to remain high. Private sector lenders Axis Bank and ICICI Bank are likely to report weak numbers on slippages.
“We expect private banks to report a decline of 7% Y-o-Y and public banks 28% Y-o-Y. With no base rate cuts for the quarter and average deposit rates declining, we should see banks reporting flat NII (net interest income) (qoq/yoy),” the brokerage said in the note.
“Retail-oriented assets like HDFC Bank, IndusInd Bank, City Union, Federal Bank and KVB are likely to report stable/better performance while other banks should report extremely weak performance,” the Kotak report said. Non-banking financial companies (NBFCs) are expected to demonstrate stable operating trends on a quarter-on-quarter basis.
Two positive trends that the report highlights are a likely fall in slippage ratios from year-ago levels and stabilisation in recovery trends. High treasury income should provide additional cushion to lenders. Retail banks are likely to have a stable quarter. In a separate note, Bank of America Merrill Lynch said private banks are better positioned than their state-owned peers as retail growth remains stable. “We estimate largely flattish Y-o-Y top line growth for all the PSBs on the back of tepid loan growth, and margins could be also flattish, implying Q-o-Q better margins, as slippages come in lower Y-o-Y.”
BofA-ML says while the asset quality will continue to be in focus, the emphasis may shift to determining if bad assets have peaked. Stress resolution will also become an area of focus.
“In our view, slippage for majority of banks should begin to peak and show an improving trend. Stress resolution may emerge as the key theme going ahead; especially with the RBI also looking to amend the S4A law to facilitate better recoveries and help keep the rise in credit costs in check,” BofA-ML said in the note.