Covid-19 impact: Loss of fee income likely to add to lenders' woes

Muted lending and subdued cross-selling amidst extended lockdown to hurt fee income and earnings

Expected decline in fee income is adding to woes of the banking sector, the outlook for which is already hazy because of delinquencies and credit costs.

The March 2020 quarter (Q4) results of three major private lenders — HDFC Bank, Axis Bank and IndusInd Bank (results declared so far) — indicate the impact on fee income.

All three reported either a deceleration in fee income growth, or a contraction. HDFC Bank, for instance, lost Rs 450 crore in fee income during Q4, in just the last few days of March when the lockdown started.
 

Though some pressure on fee income was anticipated in Q4, the magnitude of the impact of just seven days of lockdown came as a surprise. This is because it indicates the intensity of the impending pain. Given the high contribution of fee income to operating profit (36-53 per cent), any decline in this source will have a strong impact on profits.

Lalitabh Srivastawa, vice-president of Sharekhan, says: “While fee income pressure is visible in the Q4 results of banks, we believe the pressure will get elevated in the June and September quarters on account of the lockdown extension and a muted lending environment.”

 

 

The Axis Bank management, during its results announcement last Tuesday, also indicated a decline in fee income in coming quarters.

Subdued lending would mean a loss in loan processing fee, given the latter is a direct function of new sanctions and renewals, which are likely to remain subdued for now.

Besides lower credit demand, expectations that banks may be conservative in lending — mainly in high-fee earning segments such as unsecured loans — would keep a lid on fee income, say analysts. The IndusInd Bank management, during its Q4 earnings last Monday, said it will focus more on protecting its balance sheet than growth.

Extension of the lockdown and social distancing has restricted cross-selling (distribution of third-party products) opportunity for banks. Demand for MFs and insurance policies are expected to remain soft, which is also a dampener.

Loan processing and distribution are key fee income sources for banks. While some experts do believe banks could partially recoup distribution business, there is no clear visibility on the timing.

Therefore, banks’ ability to protect fee income and profitability (through cost control) will be crucial as a 10 per cent decline in fee income will drag the return on assets by 10-15 bps and return on equity by around 1.5 percentage point (150 bps), says Anil Gupta, head (financial sector ratings), ICRA.