Banks' financials may improve in Q3

Banks are likely to report better results in the October-December quarter of this financial year, primarily with the base effect from last year.
 

In the same quarter a year before, most of them had reported a dismal performance, with an increase in bad loans and provisioning after the Reserve Bank-ordered Asset Quality Review.
 

“We expect the performance in the third (December) quarter to have a favourable impact on banks with corporate loans, as compared to retail (referring to individual borrowers) assets. We see earnings growth of 100 per cent year on year,” says a report from Kotak Institutional Equities. As compared to recent quarters, slippage in asset quality is also expected to reduce, especially for public sector banks (PSBs). Some, however, had earlier said they expected to continue seeing some pressure on asset quality — State Bank of India (SBI), ICICI, Axis.
 

“We expect slippages for PSBs to be lower sequentially by 10 per cent. Coupled with continued momentum on collections, this will lead to almost flat (growth in) NPAs (non-performing assets) for many large PSBs, except for SBI,” goes a report by Nomura.
 

Though there have been concerns that asset quality might deteriorate as a result of the demonetisation exercise, the pain is not likely to be felt in this quarter. Most analysts believe the effects might begin to show from the next quarter onwards. In fact, most banks have accepted that there has been a lot of pre-payment in the retail and small & medium enterprises segment, due to demonetisation. The central bank has also given comfort to lenders by relaxing the norms around non-performing loans' recognition.
 

However, the effects of demonetisation will be felt on other earnings, such as fee income. This is because the ATM transaction fee was waived between November 9 and December 31; so was the merchant discount rate for transactions. Apart from this, the effect is also likely on loan growth. The Kotak report said the growth outlook here for deteriorated, at least for the short term, in a number of categories. This was despite the recent cuts in lending rates. These factors could specifically affect banks with high retail (to individuals) exposure, otherwise not affected by asset quality pressure.
 

However, banks will find support in the fee income component of treasury income. Net interest margins are also expected to remain stable in the quarter. However, there might be some impact due to a reduction in benchmark lending rates.

Apart from banks, non-banking finance companies are also expected to report fairly stable results. The demonetisation effects might begin to trickle in from the current quarter onwards.