Even as banks see a rise in core income and a drop in fresh bad loans, they may see a fall in non-interest income, with treasury income falling sharply on a sequential basis.
Receding pressure from slippages is likely to result in an improvement in banks’ earnings in the quarter ended March, with net interest income (NII) rising by over 20% year-on-year (y-o-y), analysts said. In a recent note, analysts at Kotak Institutional Equities (KIE) wrote that they expect banks to show stable operating performance as recapitalisation in public-sector banks (PSBs) may result in them lowering their net non-performing asset (NPA) ratios by making higher provisions. “Loan growth has been stable at 14-15% for the quarter with better negligible pricing pressure resulting in NII growth of 21%,” the note said.
Even as banks see a rise in core income and a drop in fresh bad loans, they may see a fall in non-interest income, with treasury income falling sharply on a sequential basis. At the same time, credit costs are likely to remain high as resolutions through the Insolvency and Bankruptcy Code (IBC) route lose pace. Resolution continues to evade some large accounts from the Reserve Bank of India’s (RBI) first list of NPAs — Essar Steel, Bhushan Power and Steel and Alok Industries — which were expected to have been fully resolved by March 2019. Banks did not make any large recoveries through the IBC process in Q4FY19.
Banks with a large presence in corporate lending are set to benefit the most from a reduction in fresh slippages and a gradual drop in provisions, according to a Motilal Oswal Securities report. “Revival in credit growth, along with improved pricing power, will help drive faster NII growth, while moderation in NPA formation will facilitate a gradual decline in provisioning expenses,” the report noted. KIE, too, has a positive view on corporate-focused banks, especially State Bank of India (SBI) and ICICI Bank.
While loan growth is expected to remain steady at around 15%, it will be driven largely by retail loans, experts say. “Corporate loan growth, though muted, continues to crawl upwards (up 5% y-o-y in February 2019),” KIE analysts wrote, adding, “There, however, exists diversity in corporate lending across sectors, with some segments like renewable energy attracting strong credit growth compared to others like iron and steel.”