Treasury gains to aid Q1 profitability of public sector banks: Analysts

Besides the impact of Covid-19, sluggish loan growth due to merger integration, moratorium and delay in the resolution of NCLT accounts are some of the factors that are likely to dent earnings

Despite a nationwide lockdown and near-zero business activity in the June quarter of FY21 (Q1FY21), public sector banks (PSBs) are likely to report a marginal uptick in earnings in the recently concluded quarter bolstered by low base and treasury gains.

That said, besides the dreadful impact of Covid-19, sluggish loan growth due to merger integration, higher proportion of moratorium and delay in the resolution of National Company Law Tribunal (NCLT) accounts are some of the factors that are likely to dent earnings.

"PSBs are expected to deliver net interest income (NII) growth of 5 per cent YoY and a net profit growth of about 3 per cent YoY to Rs 3,120 crore. We expect PSBs’ PPoP to grow approximately 19 per cent YoY,” wrote analysts at Motilal Oswal Financial Services in a preview note for the PSBs under their coverage, which includes State Bank of India (SBI) and Bank of Baroda (BOB).

Those at ICICI Securities believe that moderation in disbursements and lockdown will impact momentum of fee based income of PSBs, though some respite is seen from treasury.

“Earnings growth is seen broadly flat YoY, led by base effect and elevated credit cost. PSU banks are seen posting optically better growth at 80 per cent YoY, owing to base effect. SBI is seen reporting broadly earnings at Rs 4,795 crore; including proceeds from stake sale of SBI Life (2.1 per cent stake),” they noted in their earnings preview report.

According to the brokerage, SBI and BOB may, together, report an 80.3 per cent YoY growth in net profit at Rs 5,497.2 crore. Of this, Rs 4,795 crore is attributed to SBI and Rs 702.3 crore is attributed to BOB. Sequentially, this would mean a 34.5 per cent growth.

However, on the downside, analysts at Elara Capital see SBI’s net profit at Rs 1,706.6 crore, down 52 per cent QoQ and 26 per cent YoY.

Credit growth

State-owned banks, analysts at Elara Capital said, are likely to register a 4-6 per cent YoY growth in loan book, but expect a decline of 1-2 per cent QoQ amid system-wide slowdown in credit growth. Loan book for BOB is seen at Rs 6.95 trillion, while that for SBI is seen at Rs 23.4 trillion.

That apart, Phillip Capital sees SBI benefitting from the YES Bank episode, in terms of deposits.

“Consequent to the YES bank crisis, depositors have become risk averse. This would lead to huge deposit accretion in SBI,” it said in its sector preview report.

As regards the consequent net interest income – the difference between interest earned and expended – analysts see the income clocking a growth anywhere between (-)11.6 per cent and 7 per cent QoQ.

Nirmal Bang Institutional Equities estimates SBI’s NII to remain flat YoY at Rs 23,096 crore (up 1.4 per cent QoQ). On the other hand, it sees BOB’s NII up 5.7 per cent YoY at Rs 6,865.7 crore (up 1 per cent QoQ).

“The low rate environment has nudged banks to reduce deposit rates quite sharply during Q1FY21, which should provide some relief. Overall, we expect net interest margin (NIMs) to contract sequentially. Besides, non-interest revenue generation would be affected as insurance sales have been severely hit and credit generation has been tepid,” the brokerage said in a sector report.

Asset quality and moratorium

Phillip Capital sees banks containing slippages in the quarter under review due to moratorium extended by the Reserve Bank of India. The brokerage sees BOB’s slippages at Rs 4,000 crore, down 11 per cent QoQ and 40 per cent YoY. SBI’s slippages, on the other hand, are seen at Rs 8,300 crore, up 0.1 per cent QoQ but down 51 per cent YoY.

“Asset quality is likely to remain steady in the quarter under review, while recoveries would be limited. The bank may choose to shore up provisioning to build buffers for uncertainty over future asset quality. That apart, commentary on anticipated second wave of stress will be watched out for given SBI's dominant presence,” said analysts at Edelweiss Securities.