Bank earnings: Loan growth to improve, SC gives clarity on asset quality

Lenders are expected to show quarter on quarter improvement in loan growth, say analysts.

India’s reviving economy could help banks to improve loan demand sequentially even if margins may come under pressure during the January-March quarter of the previous financial year, analysts said.

However, mark-to-market losses could dent profitability for the banks due to hardening bond yields.

Bond yields started heading north after the government announced a borrowing programme of Rs 12 trillion during the Union budget for 2021-22. Between February and March, bond yields hardened by around 25 bps which could result in marked-to-market losses on banks in the bond portfolio.

“We were insulated till 6.1% levels but the yields ended at a higher level,” said a treasury head of a public sector bank referring to the yield on the 10-year benchmark government security.

The yield on the 10-year bond ended the quarter at 6.18%, up by almost 30 bps from the end of last quarter.

“Bond yields have increased during 4QFY21 which could impact the treasury book and the gains which Banks were sitting on. We expect the quantum of treasury gains to decline on a sequential basis,” said broking firm Motilal Oswal.

Bankers said recovery from Bhushan Power and Steel will help them to offset some losses incurred for bond portfolio. JSW Steel has paid Rs 19,350 crore to the financial creditors of Bhushal Power and Steel in March to acquire the company.

Net interest income of the banking sector is seen growing by 20-23% year-on-year while net profit is seen doubling in the January-March period of FY21 as compared to the same period of the previous year estimates by brokerages showed. (See Table)

Asset quality

Impacts on banks’ asset quality following the Supreme Court order last month removing the standstill on asset classification will be another key parameter to watch out for. After the loan moratorium ended in August, the apex court had ordered that banks cannot classify any loan as non-performing, which was standard till August end, till further orders. That standstill order was removed by the Supreme Court last month.

“Asset quality disclosures to be more realistic. Post SC lifting NPA recognition we will witness actual stress levels. Although we are estimating slightly higher than trend slippages before it starts normalizing from Q1FY22,” a report by Prabhudas Lilladher said.

Since banks have made some provision for proforma NPA the incremental stress on their credit portfolio is likely to be moderate. In addition, with the standstill now withdrawn, banks will be able to refocus on recovery.

“The focus is likely to shift towards actively pursuing recovery efforts as the SC stay on NPA recognition stands withdrawn. Thus, lenders would recognize actual NPAs, which would keep slippages/asset quality elevated, though the pace of formation is likely to moderate,” Motilal Oswal said.

At the same time analysts said they would be watchful on asset quality with the recent surge on Covid-19 cases which resulted in several state governments imposing lockdown and restrictions on activities.

“We reiterate our view that large banks are likely in better shape to absorb the Covid impact given higher share of granular loans in the retail portfolio and greater emphasis on the salaried segments, relatively safer segments within SMEs and higher Covid provisions,” Kotak Securities said in a note to its clients.

“We expect these banks to come out of the Covid crisis both on growth and profitability faster than banks which have a higher emphasis in the self-employed or SME portfolios,” it added.

Margins

Apart from the removal of the stay on standstill, the Supreme Court has also directed the bank to refund interest on interest charged to borrowers during the moratorium period, March-August 2020. The Reserve Bank of India has also asked the lender to refund compound interest to borrowers. The Centre is unlikely to bear the cost like it did for loans below Rs 2 crore.

“Reversal of interest on interest for loans above Rs20mn during moratorium period will have varied impact on banks,” analysts at ICICI Securities said while adding robust accretion of low cost deposits, shift in portfolio mix towards retail among others would offset adverse impact of interest income reversal and credit-deposit ratio moderation. As a result, net interest margins are likely to be stable.

“The impact would differ across banks based on the loan composition but initial estimates suggest the impact would be around 10 bps on NIMs. Public banks would have a higher impact as compared to private banks. We are not sure if lenders would get any relief from the government as they got for loans less than Rs 20 mn,” Kotak Securities said.

Loan growth

Banks are expected to show quarter on quarter improvement in loan growth, analysts said.

“Most financiers have disclosed 3-6% Q4FY21 credit growth QoQ. They are warming up credit engines to a select few less risky segments for growth – secured retail lending and some pickup in industry and service sector credit. Some banks from negative or flat growth have moved in low single digit positive growth territory,” ICICI Securities said.

According to Motilal Oswal, loan growth is likely to pick up, led by rising consumer demand, particularly in the retail segment. “Even growth in the Corporate segment is recovering, with the focus on lending to highly-rated corporates. Banks, however, remain cautious about growing their unsecured portfolio,” it said.