Don’t miss the latest developments in business and finance.

Economic slowdown, low GDP growth likely to hurt banks' earnings: Analysts

After the balance sheet clean-up in March 2018 and June 2019 quarters, banking sector, mainly corporate lenders, were expected to see sharp improvement in asset quality and credit cost and earnings

8% annual growth needed for GDP to touch $5 trn by FY25: Economic Survey
Shreepad S Aute
3 min read Last Updated : Sep 03 2019 | 2:09 AM IST
A 25-quarter-low gross domestic product growth print of 5 per cent for the April-June 2019 quarter (first quarter or Q1), indicating further slowdown in economic activities, has deteriorated the earnings outlook for Indian banks. The slowdown is likely to lead to higher asset quality pain, compared to analysts’ earlier estimates, thereby higher bad loan provisioning.

In fact, after the balance sheet clean-up in March 2018 and June 2019 quarters, the banking sector, mainly corporate lenders, were expected to see sharp improvement in asset quality and thus, credit cost and earnings. However, now, the improvement is expected to be lower.

Morgan Stanley recently slashed its earnings estimates for State Bank of India (SBI) and Axis Bank by 30 per cent and 8 per cent for 2019-20 (FY20) and by 17 per cent and 10 per cent, respectively, for 2020-21. The foreign brokerage revised its FY20 credit assumptions (provisioning as a percentage of average loan book) northward by 45-50 basis points for these lenders due to likely additional bad loans amid economic slowdown and new recent corporate slippages.

Notably, the expected asset quality stress is not limited to the corporate segment, but some pockets of banks’ retail book are also expected to be impacted by economic slowdown.



According to Ambit Capital, besides the recent corporate slippages, the economic slowdown would impact unsecured retail loans, agriculture and microfinance loans, commercial real estate and non-banking finance companies, and poor-rated corporates where there is risk of downgrades. This indicates a likely upward revision in the stressed loan book of the banking sector in the near term.

In fact, in Q1, too, besides corporate slippages, some banks had indicated the increased pain in non-corporate book, mainly agriculture, retail and small and medium enterprise segments. HDFC Bank and ICICI Bank, for instance, witnessed rising delinquencies in their respective personal loans, including credit card and other retail segments in Q1.

However, these retail impairments are not significant yet and seem to be cyclical, and analysts also expect some recovery. Also, the overall credit cost in the next two years is likely to remain better than the previous two years. Banks such as Axis Bank, SBI, and HDFC Bank are also expected to benefit from good operating performance.

Some of these expectations on bad loans though are also reflecting in the Nifty Bank index, which is down 13 per cent in the last three months versus an 8 per cent fall in Nifty50. 

Overall, investors looking for exposure to banks are recommended to be selective.

Topics :Gross Domestic Product (GDP)Indian banking sectorIndian BanksIndian EconomyIndian economy 2019GDP growth

Next Story