Bad loans, other challenges seen hurting Q4 earnings of banks

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The fourth quarter of financial year 2017 will continue to be a challenging quarter for banks. Moderate loan growth, surplus liquidity, decline in trading gains sequentially and lack of resolution of bad loans would dent earnings of banks. However, retail-tilted and mid-sized private banks would continue to outshine peers as seen in the previous quarters.

Public sector banks, too , would report sliding profits due to decline in trading gains and higher provisions but on a year-on-year basis their earnings is expected to be strong, as the base quarter was impacted by central bank’s asset quality review(AQR).

Analysts say that they expect balance sheet clean-up for ICICI Bank and Axis Bank to continue in the fourth quarter, impacting their profitability.

As of March 17, banking sector loans had grown just 4.4 per cent compared with 10.9 per cent in the previous year — the weakest pace since the fiscal year ended March 1954.

Bank loans were impacted by demonetisation that happened during the busy season. Corporate loan growth degrew by 5 per cent year-on-year as of February 2017 due to weak investment sentiments and excess capacity in place.

Demand for working capital loans was also weak due to continued economic moderation.

Banks took a cautious approach towards loan again property and micro finance loans, weak resolutions to NPA accounts.

Banks also reduced their marginal cost of funds based lending rates sharply in January. This would impact yields on loans, negating the benefit of high interest income reversals in Q3 of FY17 and lower cost of funds.

Reduction in cost of funds would marginally negate the impact of pressure on yields.

“Last quarter, banks parked excess liquidity (collected due to demonetisation) in government securities and with reversal of yields, chances of MTM provision on investment portfolio have increased.

Further, banks would continue to see ageing-related NPA provisions (RBI AQR led to bulk of NPAs insecond half of FY16). Hence, overall provisions would continue to dent earnings,” said Alpesh Mehta analyst at Motilal Oswal Securities.

Asset quality concerns would continue due to delay in expected resolution in the steel sector, some large accounts may be recognised as NPA, and the lag impact of demonetisation results in slippages from small value accounts. RBI AQR in FY16 led to high NPAs and weak recoveries till date, provision levels are likely to remain elevated (ageing of NPAs).

“Our top picks among corporate lenders are ICICI Bank, SBI, and Punjab National Bank. Among the mid-sized banks, we like YES Bank and Equitas,” added Mehta.

“We maintain our positive stance on retail/tier II private banks with preferred bets on Kotak Bank and City Union Bank. Among the corporate-heavy banks, we prefer ICICI Bank (attractive valuations). Among PSBs, we prefer SBI and BOB, given relatively better capital adequacy ratios. These are an opportunity to capitalise on the cyclical macro upside and resolutions in asset quality,” said HDFC Securities.

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