1. Bank and NBFCs bad loans woes: Earnings may fall 15%, says kotak

Bank and NBFCs bad loans woes: Earnings may fall 15%, says kotak

Earnings likely to decline by 15% y-o-y due to provisions for bad loans; retail-oriented banks expected to report stable/better performance

By: | Published: October 10, 2016 6:07 AM

Earnings growth is likely to be in the negative zone at 15% y-o-y as banks make high provisions for bad loans. We see public banks reporting lower slippages q-o-q, but high provisions will continue, while Axis/ICICI Bank would have very weak quarters on slippages. Treasury gains would be strong, mostly used to improve coverage. We expect stable q-o-q operating trends in NBFCs. Lower marginal borrowings cost will translate into higher NIM over next few quarters; however, business outlook across segments for H2 is crucial.
Strong treasury income provides support to an otherwise weak quarter

We expect banks to report 15% y-o-y decline in earnings on the back of accelerating revenue growth of 18% y-o-y led by higher treasury income as they continue to provide for bad loans (82% y-o-y) for NPLs. 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 (q-o-q/y-o-y). 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 weak performance.


Slippage ratios likely to improve further
Two trends, mostly positive for the sector are: (i) slippage ratios should decline further from Q1FY16 levels as key portfolios have already taken a fair bit of pain (ii) recovery trends are still stable and high treasury income should give adequate comfort to banks to lower headline NPL ratios by making higher coverage/writing off of loans. Private banks Axis Bank and ICICI Bank should report very weak performance. ICICI Bank has a strong quarter with the insurance stake sale which can be used for making higher/contingent provisions.



Real activity showing no signs of improvement
With interest rates declining by 50 bps during the quarter, most banks are sitting with strong treasury income. A back-of-the-hand calculation indicates this would be 1.25% of the investment portfolio adjusting for the duration. A large part of it is sitting in the HTM portfolio, but we do believe that the high OMO (Open Market Operations) of RBI should result in it being reported as actual gains. The sector continues to face an environment of slow growth. Recent sectoral composition of credit shows growth at less than 5% y-o-y with corporate loans flat y-o-y. Only retail continues to drive growth at ~20% y-o-y, largely led by housing loans. Underlying volume growth (housing, auto and CV) is showing mixed signs and that remains the only concern at this stage.




NBFCs: More of the same; outlook is divergent
We expect NBFCs to deliver q-o-q stable trends in growth and profitability. Most NBFCs are looking forward to the H2 with optimism though they have not seen much pick up during the quarter. We do not find significant change in NIM q-o-q as gradual reprising down of liabilities is getting passed on as well. Sharp decline in bond yields has incrementally benefitted the large AAA-rated NBFCs and small players; the impact should be visible in H2.

—Kotak Institutional Equities

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