PSB Q2 review: NII, net profit improve; experts see higher slippages ahead

Banks may report higher NPAs on account of DHFL, Coffee Day Enterprises, Cox & Kings, and possibly Vodafone Idea in the coming quarters

Over 100 per cent year-on-year (YoY) growth in net profit and double-digit drop in gross non-performing assets (GNPA) marked the September quarter earnings for the banking sector. Analysts, however, caution that the worst may not be over yet, and the sector could see more slippages in the coming quarters.

This, they believe, could be on the back of banks reporting more bad loans on account of DHFL, Coffee Day Enterprises, Cox & Kings, and possibly Vodafone Idea. That apart, slippages can also rise in the coming quarters of the current financial year (FY20), as banks are yet to recognise some of the stressed accounts as non-performing assets (NPAs). Mid-and small-sized banks, analysts say, are more at risk.

Given the Supreme Court’s decision on the long-pending Essar Steel insolvency issue, however, could be a silver lining for the PSBs. Analysts say move is expected to not only free up a significant amount stuck in resolution, but strengthen the position of banks in negotiating resolutions. According to Yuvraj Choudhary, a banking analyst at Anand Rathi, the ruling paves way for similar long-pending cases in the financial sector which could, in effect, push recoveries in the quarters to come. READ MORE HERE

“Banking sector showed better performance on a yearly basis aided by a low base effect... The risk, however, is not out of the way,” says Mona Khetan, an analyst tracking the sector at Reliance Securities. 

Asset quality in Q2FY20 was broadly stable sequentially, analysts at Kotak Securities said in a note, as there were no major resolutions in the corporate segment. Slippages, however, continued to be on the higher side. Excluding State Bank of India (SBI), aggregate slippages for the rest of the banks were higher by around 40 bps sequentially at 4.3 per cent owing to slippages in multiple large corporate accounts.

The bottom-line performance of these banks, however, improved significantly with net profit rising in the range of 74 to 219 per cent. Operating profit, too, increased up to 74 per cent YoY and 25 per cent QoQ. Overall, the net interest income (NII) for PSBs rose 13.6 per cent, while the operating profit rose 28.2 per cent year on year.

“Non-interest income growth was robust at over 30 per cent driven primarily by strong treasury gains in Q2FY20 compared to treasury losses in the prior-year quarter… Growth in operating expenses was on the higher side, at 15 per cent YoY for the sector (excluding BoB) in the recently concluded quarter. PSU banks (ex-BoB) witnessed an 11 per cent rise in operating expenses mainly driven by higher provisions for retirement-related benefits. Excluding this, growth in operating expenses was muted for public banks,” said the report by Kotak Securities.

According to Darpin Shah, an analyst at HDFC Securities, mid and small-sized players continue to remain at risk as the asset quality has seen continuous deterioration. GNPA ratio for Allahabad Bank, for instance, jumped 12 per cent QoQ and 8.6 per cent on a yearly basis, while that of Indian Bank increased 0.5 per cent YoY. Among larger banks, only PNB reported a QoQ rise in GNPA. For the sector, total GNPAs declined 12.1 per cent YoY.

At the bourses, most banking stocks have done well since the government announced a cut in corporation tax rate. SBI, for instance, surged over 17 per cent, as against an 11 per cent rise in the Nifty50. That apart, Canara Bank (up 8 per cent), Bank of India (9 per cent), and Central Bank of India (9.6 per cent) were among the top gainers.

THE ROAD AHEAD

Analysts remain hopeful of a better H2FY20 in terms of better loan growth, on the back of declining lending rates, and improving operating environment.

On average, most analysts expect banks to report better net interest margin (NIM) owing to rise in the share of low yielding retail loans, drop in interest reversals for most banks, one-off interest income recognition from resolved accounts under NCLT, decline in policy rates, and movement in retail term-deposit (TD) rates.

As an investment strategy, analysts advise investors to stick with banks that have decent valuations and low corporate risk, including SBI and BoB.