Banks with big corporate exposure likely to see fall in January-March earnings

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New Delhi | Published: April 11, 2018 3:16:15 AM

Banks that have a large corporate exposure are likely to report a sequential decline in earnings in the January-March quarter due to an increase in loan-loss provisions, lower contribution from treasury income and weak net interest income (NII) growth, according to most analysts tracking the sector.

banks, hdfc bank, corporate sector, federal bankKIE expects some retail-oriented lenders, such as HDFC Bank, IndusInd Bank, City Union Bank and Federal Bank, to report stable/better performance.

Banks that have a large corporate exposure are likely to report a sequential decline in earnings in the January-March quarter due to an increase in loan-loss provisions, lower contribution from treasury income and weak net interest income (NII) growth, according to most analysts tracking the sector.

“We see an improvement in loan growth — ~10% year-on-year (y-o-y) — but high slippages and margin pressure leading to weak NII growth (5% y-o-y), which coupled with decline in contribution from treasury would result in muted revenue growth (2% y-o-y),” Kotak Institutional Equities (KIE) wrote in a recent report, adding that lenders, especially public sector banks (PSBs), will benefit from the Reserve Bank of India’s (RBI) recent dispensation allowing the amortisation of investment provisions over four quarters.

KIE expects some retail-oriented lenders, such as HDFC Bank, IndusInd Bank, City Union Bank and Federal Bank, to report stable/better performance.

Analysts say that conditions for an improvement in banks’ net interest margins (NIMs) seem to be falling in place, given that interest rates and loan growth are both rising. In a note dated April 9, investment bank Jefferies said an environment of tighter liquidity may push margins up. “With RBI lowering its inflation expectation by more than 30 basis points (bps) for next fiscal, expectation of a repo rate hike has been pushed to H2FY19. That said, with improving loan growth and higher L/D (loan/deposit) ratio, liquidity has remained tight with banks raising both MCLR (marginal cost of funds-based lending rate) and time-deposit rates, which is beneficial for NIMs,” analysts at Jefferies observed in the note.

Nomura, however, expects margins to be under pressure, with the NIM for private banks remaining flat sequentially at nearly 3.8% and that at PSBs deteriorating a few bps to below 2.5%.

Loan growth is likely to continue being driven by retail assets, while corporate lending may continue to languish. KIE said that while there will be some positive impact of higher commodity prices and shift to bank borrowing from the bond markets, they may not make a meaningful difference. “Medium-term outlook for corporate loan growth remains weak given ongoing deleveraging of large corporate borrowers, lack of large-ticket capex and regulatory thrust towards moving exposure of large borrowers from banking system to bond markets,” the brokerage noted.

Slippages are set to rise; Nomura expects the top six corporate lenders to report slippages worth `75,500 crore, up from the Rs 35,000 crore-50,000 crore range seen over the last six quarters. This, in turn, would lead to a 50% y-o-y rise in provisioning. “The key will be to see if these slippages are restricted to the defined non-NPA (non-performing asset) stress book and a couple of large non-NPA names like Aircel/Nirav Modi group and the consequent impact on capital ratios and ability to grow,” Nomura said.

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