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Banks’ earnings growth in the October-December period is likely to be limited despite improving liquidity, ebbing cost pressures and steady loan growth offering some respite to lenders in an uncertain macroeconomic environment.
Asset quality erosion, fresh loan restructuring and unprovided mark-to-market (MTM) losses (revaluing assets at current prices) are again expected to muffle the growth in quarterly profit. For several quarters, private sector banks, especially the new ones, have outshone their state-run rivals in earnings. Sector analysts say this trend will continue in the third quarter of 2013-14.
"We expect earnings divergence among our coverage banking stocks to continue... Given the current state of yields, the unprovided MTM losses are likely to require meaningful provisioning for some public sector banks. No provisioning (is required) for new private banks on this count, as they have already provided fully," Vaibhav Agrawal, vice-president, research (banking) at Angel Broking, wrote in a note to clients.
Flat margins, low fee income
The Reserve Bank of India (RBI)'s exceptional liquidity tightening measures were normalised during the quarter. This, coupled with the strong inflow of foreign currency non-resident (bank) [FCNR(B)] deposits, led to an improvement in liquidity and eased the short-term borrowing cost for banks. However, analysts believe this will not immediately translate into margin expansion and the full benefit of lower cost of funds will be visible only from the fourth quarter.
The growth in banks' non-interest income is also expected to remain slow in October-December as earnings from fees and commissions have decelerated in recent months. "Fee income growth is expected to be muted. Banks have already seen growth in liabilities-related and third-party product-related fees. (Hence) incremental fee income growth is expected to remain tepid," Saikiran Pulavarthi, banking analyst with Espirito Santo Securities, said.
While analysts expect slippages to moderate in the third quarter, credit quality stress is likely to stay elevated. Private sector banks have not been spared from asset quality pressure but analysts say these lenders have performed reasonably better than the state-run ones on loan recoveries.
Sale of bad loans to asset reconstruction companies (ARCs) has also seen a pick-up, as most banks now appear determined to improve their credit quality. Analysts estimate banks put assets worth Rs 4,000 crore for sale to ARCs in the October-December period. The recoveries from written-off accounts could prevent a sharp erosion in banks' profitability during the quarter, they said.
Referrals for corporate debt restructuring (CDR) in the third quarter was estimated to be Rs 29,000 crore, compared with Rs 25,000 crore in the previous three months.
"However, in the last two months, proposals were only Rs 6,000 crore. Though the trend is encouraging, we prefer to wait and watch, as this could be on account of RBI clamping on banks for higher restructuring," Alpesh Mehta and Sohail Halai, analysts with Motilal Oswal Securities, wrote in their research note.
Analysts caution that moderation in economic growth, high inflation, delay in monetary easing and stretched balance sheets of some companies remain key risks.
Highlights:
Positives in Q3:
- Improving liquidity situation
- Ebbing stress on cost of funds
- Stable loan growth
- Asset quality stress staying elevated
- Fresh loan restructuring
- Un-provided MTM loses, especially for public sector banks
- Angel Broking: Axis Bank, ICICI Bank, State Bank of India and Bank of Baroda
- Bank of America Merrill Lynch: ICICI Bank, HDFC Bank and Punjab National Bank
- Karvy Stock Broking: Development Credit Bank, State Bank of India and Punjab National Bank
- Motilal Oswal Securities: HDFC Bank, ICICI Bank, State Bank of India and Oriental Bank of Commerce
- Prabhudas Lilladher: ICICI Bank and Axis Bank
