Bad loan, MTM provisions may extend banks’ losses

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Mumbai | Published: July 10, 2018 6:22:49 AM

Banks are likely to report losses in the April-June quarter due to high provisions for bad loans as well as mark-to-market (MTM) provisions on their investment portfolios, according to most analysts tracking the sector.

bad loan, mark-to-market, Kotak Institutional Equities, MTM provisions, HDFC Bank, IndusInd Bank, City Union Bank, marketCoupled with increases in lending rates, this should aid a recovery in net interest income (NII), KIE observed, adding that retail-oriented banks, such as HDFC Bank, IndusInd Bank and City Union Bank, are likely to report stable performance.

Banks are likely to report losses in the April-June quarter due to high provisions for bad loans as well as mark-to-market (MTM) provisions on their investment portfolios, according to most analysts tracking the sector. “We expect banks to report another quarter of steep loss… On interest rates, there are two developments for the quarter resulting in MTM provisions — a 50-basis point (bps) increase across the yield curve and a tightening of rules in the valuation of state g-sec instruments from fixed mark-up to market prices,” Kotak Institutional Equities (KIE) wrote in a recent report.

The brokerage, however, sees an improvement in loan growth — pegged at 12% year-on-year (y-o-y). Coupled with increases in lending rates, this should aid a recovery in net interest income (NII), KIE observed, adding that retail-oriented banks, such as HDFC Bank, IndusInd Bank and City Union Bank, are likely to report stable performance. KIE also said 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.

“While we have seen fresh lending rates move up marginally, average lending rates are still 60-80 basis points (bps) above the fresh lending rates. This gap needs to narrow down as the portfolio is still witnessing pressure on the downside while the cost of funds has already started to increase,” the KIE report stated. Slippages, which also have a bearing on NIMs, are a key imponderable. In recent days, some experts have suggested that fresh bad-loan accretion may have peaked, with the share of special mention accounts (SMAs) in banks’ portfolio falling.

In a report released last week, ratings agency Icra said 70 large accounts, mainly from the power, engineering, procurement and construction (EPC) and telecom sectors and aggregating `3.8 lakh crore, will require resolution by September 1, 2018, as per the revised framework for resolution of stressed assets notified by Reserve Bank of India (RBI) in February 2018. “Of these cases, 34 cases totalling 41,000 MW of power generation capacity with a total debt of around `2 lakh crore will require a resolution under revised framework. Of the above `3.8-lakh-crore exposure, Icra estimates that 92% is already classified as NPA (non-performing asset) by the banking system,” the report stated.

In a scenario of 60-65% provisioning requirements on accounts to be resolved and normal slippages of around 3% for the full year FY19, the credit provisions for public-sector banks (PSBs) are estimated at `1.4-2 lakh crore. Taken together with losses on bond portfolios, this will mean the overall losses for PSBs during FY19, Icra said.

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