Private banks may see NIMs dip in Q2FY21; loan restructuring roadmap eyed

The July-September quarter for financial year 2020-21 (FY21) may mark the beginning of downtrend in net interest margins (NIMs) for banks, fear analysts. That apart, market participants would watch out for greater clarity on NPA recognition, loan restructuring roadmap, and credit costs for the rest of the year.

“Q2FY21 earnings for the BFSI sector will be a reflection of a path half way through normalisation on some parameters, but just the beginning of journey for stress recognition and downward NIM trajectory,” observed analysts at ICICI Securities.

The six month moratorium period, provided by the Reserve Bank of India (RBI), ended on August 31, 2020. However, due to the petitions filed in the Supreme Court challenging interest on interest being charged by banks on moratorium sought, banks have been prohibited from recognizing non-performing assets (NPAs) till the case is disposed. Additionally, guidelines for loan recast for special mention accounts-0 (SMA 0) were also issued early September.

In this backdrop, analysts at Prabhudas Lilladher would focus on stress/collections post moratorium and direction about restructuring and slippages in H2FY21. “The Supreme court’s interim order to bring standstill on NPA declaration will make asset quality look better. Moreover, provisions will continue to be on the higher side to conservatively protect any impending hits on the balance sheet and smoothen the impact,” they said in a sector preview report dated October 9.

PAT growth

Estimates by Motilal Oswal Financial Services peg the contraction in pre-tax profit at 7.1 per cent on a yearly basis for the banks under its coverage. Growth in profit after tax, however, is pegged at 30.5 per cent YoY.

“We expect HDFC Bank/ ICICI Bank to post PAT growth of 18 per cent/ 329.5 per cent YoY (aided by low base), while Axis Bank should post profit of Rs 1,370 crore versus a loss last year,” it pointed out.

Phillip Capital, meanwhile, in an October 6 report, said that private banks in their universe – which includes Axis bank, DCB bank, HDFC Bank, IndusInd bank and Kotak Mahindra bank --  may clock 9 per cent YoY growth in pre-provision profit (PPoP) and a 16 per cent yearly jump in revenue.

As regards loans, Nomura sees the credit book expanding between 1.6 per cent (IndusInd Bank) and 15.6 per cent (HDFC Bank) on a yearly basis. Kotak Bank, however, is seen as an outlier on the downside with a de-growth of 2 per cent YoY.

 

“Overall loan growth will likely remain muted for banks, thus exerting pressure on core PPoP performance. We expect banks to continue to face margin pressure thereby offsetting capital infusion-led benefit with higher liquidity on the balance sheet. We build in a 5bps decline in NIMs for most banks,” it said.

On the other hand, IIFL Securities remains conservative and estimates the loan growth for large banks to decrease 9 per cent YoY while deposit growth is expected to remain strong with 17 per cent YoY growth. NIM, it said, should remain stable on a sequential basis as lower loan-to-deposit ratio (LDR) and higher liquidity may get offset by lower cost of deposits and the impact of capital infusion in H1FY21.

On the asset quality front, ICICI Securities, said the left-over pool, outside of collection and restructuring (actual + potential) bucket, may be prudently recognised upfront in Q2FY21.

“Slippages from SMA-1/2 pool as of 1st March and prudent recognition of stress will drive NPL movement this quarter. This will be partially offset by aggressive write-offs… The regulatory requirement is 10 per cent provisioning on restructure pool but banks can provide higher conservatively, if need be. Both these components may keep credit cost volatile and elevated in Q2FY21,” it said.

Key monitorables

As the quarter remains largely muted, analysts would eye forward looking guidance. Narrative on quantum and texture of restructuring (actual + potential) post moratorium; slippages from SMA-1/2 pool as of 1st March and prudent recognition of stress; provisioning build-up; retracement of fee income and support from treasury profits; and extent of cost flexibility retained are among the key factors that analysts would track.

“Q2FY21 remains the most critical quarter with commentary around collection trends specifically in Sep-20; potential restructuring; festive demand trends; and opex normalization and fee traction to give direction to the sector,” said Nomura.