PSB Q2 preview: NPA recognition ruling to prevent higher slippages

Analysts pegs SBI's PAT at Rs 3,435.5 crore for the quarter under review, at Rs 517 crore for Bank of Baroda, and at Rs 189 crore for PNB

Earnings expectations for the recently concluded quarter (Q2FY21) continue to be uncertain for public sector banks (PSBs). While analysts agree that the credit growth could be sluggish, coupled with delayed bad loan resolutions, the quantum varies across the board.

Analysts at Motilal Oswal Financial Services, for instance, expect most PSBs to see muted profit growth for banks under their coverage impacted by sluggish loan growth, higher proportion of MSME/SME loans, and delay in resolution of stressed accounts. Consequently, the brokerage sees the net profit declining 16 per cent year-on-year (YoY) for the sector. State Bank of India (SBI), however, remains an exception, they say.

On the contrary, analysts at Nirmal Bang foresee the PAT surging a whopping 437 per cent YoY for the government-owned banks under its coverage, which includes SBI, Bank of Baroda, and Punjab National Bank, on the back of likely lower provisions and stable asset quality.

“In the PSB space, we expect BoB and PNB to continue to address merger-integration issues. In a way, the current environment (of low credit creation) provides these two banks an opportunity to focus their efforts on mending the existing stock of NPAs and overcoming merger-related issues,” it said in its results’ preview report.

The brokerage pegs SBI’s PAT at Rs 3,435.5 crore for the quarter under review, at Rs 517 crore for BoB, and at Rs 189 crore for PNB.

A similar projection of 435 per cent YoY growth in PAT was given by Prabhudas Lilladher, for the same banks in question, on expectation that SBI would hold up the flag for PSBs in-line with industry loan growth, adequate provisions and lower asset quality issues while “other PSBs will remain muted with BOB still reeling out of higher legacy provisions and PNB should consolidate the business due to merger in April 2020”.

Credit growth and asset quality

Spread between outstanding and marginal loan yields widening to as high as over 100bps for PSU banks (compared to 60-70 average for past 5 years) – seems to suggest that repricing is yet to play out and risk premium amidst uncertainty has kept yields elevated, noted analysts at ICICI Securities.

Besides, lending spread (average lending rate over deposit rate) is at 300bps for PSBs. Portfolio mix, the brokerage says, seems to be shifting in favour of better-rated SMEs/corporates, secured retail lending could entail further pressure. “Over and above this, recognition of stress, NPL build-up, consequent interest de-recognition and downward repricing of loans (under restructuring scheme) will further knock down lending yields,” it said.

It sees SBI’s loan book growing 8 per cent YoY and 1 per cent sequentially to Rs 23.21 trillion, while deposits are seen at Rs 3.47 trillion.

Those at Prabhudas Lilladher, on the other hand, see SBI’s loan book at Rs 23.05 trillion. For PNB and BoB, loan growth is seen at 51 per cent and 5.6 per cent YoY, respectively, at Rs 6.46 trillion and Rs 6.72 trillion.

Asset quality, meanwhile, may improve as the Supreme Court ruling on freezing the non-performing asset (NPA) recognition would prevent higher slippages.

“From moratorium, the focus of the investor community will shift to the quantum of loans that are likely to come up for restructuring. We do not expect NPAs to crystalize for another 6 months. In light of such uncertainty coupled with a stressed external environment, we expect banks’ credit costs to remain elevated in Q2FY21,” said a preview report by Nirmal Bang.

NII and NIMs

The rise in net interest income (NII) – one of the bank’s major sources of income – could range between 6 per cent and 14 per cent on a yearly basis.

Nirmal Bang pegs NII growth of around 8 per cent YoY, but 0.7 per cent decline QoQ, for SBI. As regards, BoB, the income may fall 3 per cent YoY and grow 0.3 per cent QoQ.

Centrum Broking, meanwhile, expects SBI’s NII to grow 7.1 per cent sequentially but fall 1.1 per cent YoY.