Banks’ earnings in Q2FY18 are likely to decline on a year-on-year (y-o-y) basis as revenue growth remains suppressed and provisioning requirements take a toll, analysts said.
In a recent report, brokerage Kotak Institutional Equities wrote that banks’ earnings are likely to fall 3% y-o-y provisions. Revenue growth may be supported by a divestments in the insurance subsidiaries of large lenders State Bank of India (SBI) and ICICI Bank.
Treasury income is expected to remain weak for the banking sector because of the recent uptick in interest rates. “We expect private banks to report an increase of 25% y-o-y while public banks could report a decline of 65% y-o-y,” Kotak researchers said in the note, adding that net interest income (NII) at banks should improve marginally from the quarter ended June as there have been no base rate cuts for the quarter and average deposit rates have fallen.
Nomura expects a normalisation in retail and agri slippages for corporate banks, which has inched up in Q1. The investment bank said on Monday that telecom companies Aircel and Reliance Communications (RCom) may lead to some rise in slippages over the next two-three quarters, but there should be an overall reduction in slippage levels.
“Provisioning will remain high as banks provide for National Company Law Tribunal cases and ICICI/SBI will likely use capital gains from subsidiary stake sales to improve their overall provision coverage, in our view,” Nomura said in a note.
Both Kotak and Nomura expect retail-oriented banks to perform better than corporate banks, who are seeing the impact of weak loan growth and pressure on net interest margins (NIMs). “The savings account (SA) rate cut (Aug-17) of 50bps (basis points) should help net off some NIM pressure, but core PPOP growth is unlikely to surprise positively,” Nomura said.
Margins may also continue to suffer from disintermediation, or the phenomenon of borrowers shifting to the markets from bank borrowings. After SBI announced its Q1 results, managing director B Sriram had said, “There will be a small difference (in margins from loans and market lending) in the sense that the MCLR (marginal cost of funds-based lending rate) is at 8% and even if you go for the three-month MCLR of 7.9%, the difference between market and the loan book or the loan pricing would be about 50-60 basis points.” Sriram added that the loss would be made up by the additional business the bank was getting from the market.