Banking sector woes to continue in Q1; bigger banks to perform better

 

New Delhi, Jul 9: Banking sector woes are expected to continue in the first quarter of the financial year with weak profits despite a pickup in retail-backed credit growth and easing of fresh bad loans.
Mid-sized private lender IndusInd Bank will kick-off the earnings season reporting its first-quarter results Tuesday. With no surprises, the bank is expected to post stable profits driven by healthy loan and interest income growth. Karnataka Bank will report its numbers Thursday, July 12.
“While the system-wide (loan) growth has picked up, a number of public sector banks (PSBs) have a constraint in lending and the space vacated by state-owned banks is likely to be filled by private banks… We expect the large private lenders to grow their advances in the range of 15-20 percent, except for a few PSBs other might see either flat or de-growth in their balance sheets,” said Siddharth Purohit, Research Analyst at SMC Institutional Equities.
The credit growth as per Reserve Bank of India (RBI) has improved for the system to 12.3 percent for the first two months of FY19 as compared to 9.8 percent growth seen in Q4FY18.
The gross non-performing assets (GNPAs) for the industry increased by Rs 1.38 lakh crore, from Rs 8.79 lakh crore to Rs 10.16 lakh crore in the fourth quarter of the last fiscal. About 85 percent of the addition came from PSU banks, the consequent provisions weakening their capital positions.
Further recognition of existing bad loans due to the RBI’s February 12 circular and the rise in bond yields by 50 basis points (0.50 percentage points) will lead to higher provisions and continue to dent profits.
“While incremental NPA additions would cool off during the quarter, the aging-related provisions and elevated bond yields will keep provisions higher for most PSU banks. MTM (mark-to-market) losses in Q4FY18 were already elevated and it could remain high during Q1FY19 as well. And hence, we don’t expect improvement on the bottom-line front for public sector banks,” Purohit added.
On February 12 this year, the central bank released a new framework to tackle bad loans which mandated banks to classify stressed loans from the first day of default and coming up with a resolution plan within 180 days.