Private banks may see Q2 profit growth, PSB woes to persist: Study

It noted that RBI's tough stance on the cleanup of balance sheets by next March would weigh on banks' asset quality

Private sector banks are likely to see about 5 per cent uptick in earnings while profit of state-owned lenders may drop 12.7 per cent for the second quarter of this fiscal, a report said.

According to brokerage firm Motilal Oswal, private sector banks would continue to outperform public sector lenders in quarterly earnings.

"Continued asset quality stress and focus on balance sheet health would drive banks to make high provisions, which could impact earnings," the report said.

It noted that RBI's tough stance on the cleanup of balance sheets by March next year would weigh on banks' asset quality.

However, following the RBI's asset quality review (AQR) and the cleanup exercise taken by banks, the stress will see a decline on a quarter-on-quarter basis.

Besides, the report said factors such as lagged impact/harmonisation of account status of RBI's AQR, banks' continued cleanup exercise, non-fund-based exposure turning into non-performing assets for some stressed corporates and impact on the supply chain of stressed large corporates could weigh on banks' performance.

Noting that recovery efforts have accelerated, but are yet to materialise, Motilal Oswal said that weak trend can be estimated in recoveries for large corporate exposure and continued healthy trend in SME exposure.

"Banks like Punjab National Bank, BOB, Union Bank of India which have aggressively recognised stress loans over the last one year may surprise positively on this front," it said.

According to the report, employee expenses would be a key enabler for earnings growth for state-owned banks.