Bumpy road to recovery

Bank earnings grew sharply compared to the loss in the previous year (AQR-led) as provisions declined 25% y-o-y.

Bank earnings grew sharply compared to the loss in the previous year (AQR-led) as provisions declined 25% y-o-y. Even as slippages were higher q-o-q, impaired loans declined 70 bps q-o-q to 10.1% (stable on absolute basis), due to improved loan growth and higher write-offs. Revenue growth was decent at 13% y-o-y, with NIM higher for most public banks and continued support from treasury gains. Operational performance of most NBFCs improved significantly q-o-q, likely due to a demonetisation-weakened base. High valuations make us cautious; Chola and HDFC seem to be well placed. Post recent price movements, we upgrade Ujjivan to BUY and PNB to ADD; we downgrade DCB to REDUCE and KVB to ADD.

Earnings recover off a low base as provisions decline

Banks reported earnings growth, compared to a loss in Q4FY17 (driven by AQR) on the back of 13% y-o-y revenue growth and 25% y-o-y decline in provisions. Revenue growth was led by NII growth which grew 15% y-o-y as loan growth picked up to 8% y-o-y and NIM recovered from their lows. Treasury contribution to PBT was meaningful at 50%. Public banks witnessed a 17% y-o-y NII growth, 35% y-o-y PPoP growth and moved back to profits. Private banks reported 16% y-o-y NII growth, 3% y-o-y PpoP growth and 5% y-o-y growth in earnings.

Impaired loans decline but slippages higher

Impaired loans were stable q-o-q while the ratio declined 70 bps q-o-q to 10.1% with gross NPLs fell 30 bps q-o-q to 7.8%, however restructured loans declined 40 bps to 2.3%. Impaired loans of public banks fell 100 bps to 12.5% while those of private banks fell 10 bps at 5.4% of loans. The provision adjusted NPLs declined to 6.5% from 7.3% levels seen in the previous few quarters.

NBFCs: Performance improves

Coming out of demonetisation, operating performance of NBFCs improved in Q4FY17. The improvement was the highest for NBFCs in rural India that were affected by a severe cash crunch during the previous few months. We have a cautious view on the NBFC sector given high valuations, risk to any disruption due to GST implementation, vulnerability in the MFI space and competition in the housing finance.


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