Provisioning, treasury losses to hit banks' Q2 earnings

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SummaryThe banking sector is bracing itself for a poor set of earnings in the second quarter.

The banking sector is bracing itself for a poor set of earnings in the second quarter with heavy mark-to-market losses, increased provisioning and subdued credit growth likely to hit earnings. Analysts estimate that higher provisioning on account of bad loans and treasury losses may impact the profitability of the banking system by nearly 20% on a year-on-year basis.

The quarter saw the Reserve Bank of India (RBI) introducing liquidity tightening measures on July 15 to control the fall in foreign exchange. The steps led to a jump in bond yields, which rose by over 130 bps in the weeks that followed. Though some of these measures were relaxed in September, the impact is most likely to continue for banks, analysts believe.

“Revenue growth in the first quarter of the current financial year for private banks was supported by higher treasury profits, which are unlikely in the second quarter due to a sharp increase in interest rates,” analysts from Religare Institutional Research said in their report this week.

Private and public sector banks are now sitting on heavy mark-to-market losses in their available-for-sale (AFS) and held-for-trade (HFT) investment book. As one-off measure, RBI had allowed banks to move statutory liquidity ratio (SLR) securities to held-to-maturity (HTM) from AFS/HFT category up to the limit of 24.5%, at cost or market value as at the end of July 15, whichever is lower. RBI had also allowed banks to provide for the losses over a period of three quarters.

Analysts say that despite all these measures, bank earnings, especially of public sector banks maybe hit significantly. Large public sector banks may see a hit of R350-400 crore on their July-September pre-provisioning profits. While smaller state-owned banks can see a hit of R75-150 crore. Private sector banks with sizeable government security holding may see a hit of R100-150 crore in this period, analysts estimate.

The deterioration in treasury earnings is also likely to have an adverse impact on the net interest margin (NIM) of the banking industry. With analysts expecting margins to show a 10-20 basis points (bps) compression on a sequential basis for public and private banks alike.

“We expect NIM for most public banks to decline marginally (5-10bps) on sequential basis on the back of increase in short-term fixed deposit rates,” analysts from India Infoline Research said.

Leading private sector banks like HDFC Bank and Axis Bank are also expected to

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