Banking Q3 preview: Private banks to outperform PSBs; bad assets to go down

How is the banking sector placed in Q3? Siddharth Purohit takes a look in this Business Standard Special
 

The credit growth for the banking system has picked up marginally during the last few months. After hitting a multi-decade low of nearly 4% growth, corporate loans by private banks witnessed an uptick in the September quarter (Q2FY18) results. The latest data shows credit growth to be near nearly 10%, and with the last two quarters of the financial year normally being strong, overall growth is expected to be above this run rate for the entire year. However, the same old stories are doing the rounds and retail will continue to be a growth driver during the December quarter as well.

While large private lenders will still be impacted due to higher provisions, we believe the pain will be relatively lower during the quarter. Most Banks have done adequate provisions on the NCLT list one; however, there could be some additional provisions on the NCLT list two-related accounts, as most of the accounts have not been able to come to any resolutions. In few cases, the haircut could go above 70 per cent. Further, with the revised guidelines for bidding by promoters, few serious players may also not qualify to bid for their assets, and hence the credit cost could negatively surprise in few cases.

Looking on a comparative basis, we believe private banks will continue to deliver good results, however, even PSU banks will see the visible change in the numbers largely due to lower incremental slippages and resultant credit cost. On a sequential basis, the incremental bad assets will go down both for private and public sector banks. While a large part of the stressed accounts are either in the NCLT list or has been recognised, the key risk remains from the exposure to the power sector, which could throw some negative surprise in the coming quarters.

We have also seen large private banks like Axis Bank and HDFC Bank going for aggressive capital raising during the quarter and this also indicates their intention to grow their balance sheet in the quarters to come. Further, the liquidity conditions continue to be surplus and banks have enough deposits base. The overall deposit growth could be lower than the advances growth, and hence despite some reduction in rates, overall NIM could see a stable trend.

Within the PSU space, we believe Bank of Baroda (BOB) could show improved results with loan growth in excess of 12% and stable asset quality. And as far as small PSU banks are concerned, we have a positive stand on Vijaya Bank, whose stress levels are lowest among all PSU banks. 

Siddharth Purohit is research analyst at SMC Institutional Equities