Banks may see treasury gains in Sept quarter

The July-September quarter might have brought some respite for banks, as compared to the financial year’s first quarter (April-June).

“Most (especially public sector banks) will report higher treasury gains, aiding profitability,” says a Religare report.

In the June quarter, earnings were marred as the addition to bad loans remained elevated. There won’t be a respite from the non-performing assets (NPAs) problem anytime soon but analysts believe further addition to stress might come down. After the Asset Quality Review initiated by the Reserve Bank of India, banks had done a lot of cleaning of balance sheets.

“Gross stress addition is likely to moderate sharply for state-owned banks but would still be at elevated levels. We expect large private banks in the corporate lending segment to take advantage of strong profits on sale of investments to clean their balance sheets,” said a Motilal Oswal report.

  It is likely a large share of slippages in this quarter will emerge from the restructured loan portfolio, led by the infrastructure sector.

Asset quality pressure is likely to continue. A CRISIL report said gross NPAs would increase to 8.5 per cent of the total in FY17 from 7.5 per cent in FY16. Provisioning for these are expected to remain high and the impact will be felt on earnings, say analysts.

The other challenge in the September quarter was subdued loan growth. Credit growth has remained below 10 per cent. Private banks fared well because of the focus on retail (small) loans but several public sector banks (PSBs) have seen very sluggish growth. Overall, fee income from the corporate side is expected to remain weak.

“Our broad discussion with a few banks continues to indicate the core fee income growth would be subdued, as the capital expenditure cycle is yet to revive,” stated a report from Kotak Institutional Equities. Net interest margin, key indicator of a bank’s profitability, is likely to show flat growth, as lenders have not significantly reduced lending rates. “Banks have refrained from cutting the base rate/marginal cost lending rate in the first half of this financial year, which would support loan yields. Also, the cost of deposits has continued to fall,” says the Motilal Oswal report.

Analysts add that intense competition in the refinancing business and in retail loans is likely to keep incremental lending yields under pressure.