Banks’ third-quarter results may look up, supported by recoveries and treasury gains

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Published: January 14, 2020 12:28 AM

Emkay also said that yields on government securities (g-secs) continue to trend down, with support from Operation Twist, which should help public-sector banks (PSBs) report healthy treasury gains.

Overall decline in the loan-to-deposit ratio and slower growth in high yielding retail loans could weigh on margins. Overall decline in the loan-to-deposit ratio and slower growth in high yielding retail loans could weigh on margins.

The Banking sector’s profits are likely to grow 15-20% year-on-year (y-o-y) in the December quarter on the back of recoveries from chunky bad-loan accounts and gains in treasury income, analysts have said.

At the same time, slippages may remain high for the quarter, with non-banking finance companies (NBFCs) such as Dewan Housing Finance Corporation (DHFL) and Reliance Home Finance turning sour.

In a recent report, analysts at Jefferies wrote that Q3FY20 will see lumpy settlements — either through the insolvency route or otherwise — of around Rs 76,500 crore from just four exposures, namely Essar Steel, Ruchi Soya, Prayagraj Power and RattanIndia Amravati.

Barring RattanIndia, recovery in the other three accounts as a share of book value ranges between 0.2% and 11% for different banks, with State Bank of India recovering 6.6% and ICICI Bank recovering 2.1%.

In an environment of muted credit growth and falling interest rates, banks are expected to see their margins shrink. “Yields could soften as MCLR cuts over the recent quarter get transmitted. Overall decline in the loan-to-deposit ratio and slower growth in high yielding retail loans could weigh on margins. The offset could come from deposit rate cuts that have been taken over the previous quarters,” Jefferies said.

Analysts say margins could be better for corporate banks. Emkay Global Financial Services, “Corporate banks are likely to report stable better margins and lower NPAs (non-performing assets), mainly due to lumpy NPA resolution including Essar Steel. Most private banks have migrated to the new low tax rate regime with DTA (deferred tax asset) impact largely factored in Q2, and these private banks will benefit in Q3 due to lower tax provisions.”

Emkay also said that yields on government securities (g-secs) continue to trend down, with support from Operation Twist, which should help public-sector banks (PSBs) report healthy treasury gains. “However, weakening economic trends and rising risk around inflation post flare-up in crude prices, may pose a risk to g-sec yields,” the broking firm said.

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