Provisions may dent PSU banks' Q2 earnings: Merrill

The earnings growth of India’s state-owned banks for the July-September quarter is likely to be hit by the non-performing loan provisioning and a higher base, a Merrill Lynch report said.

“While banks will gain by investment write-backs (as bond yields have fallen 50-70 basis points quarter-on-quarter), the NPL provisions may be much more for many government banks,” Merrill Lynch said.

These provisions are likely to more than offset the gains banks would make from writing back mark-to-market provisions on the G-sec book made by them during the previous quarter. This could even result in earnings contraction for banks such as Oriental Bank of Commerce , Vijaya Bank and Canara Bank, the report said.

In some cases such as of those of Bank of Baroda and Indian Bank, low base effect may result in 6-7 times jump in provisioning. Merrill Lynch expects Bank of India, Union Bank, and Bank of Baroda to lead earnings growth with over 25-30 per cent bolstered by robust topline and write-back of investment provisions.

For most banks, net interest income growth is likely to be strong at over 20 per cent owing to better-than-estimated loan growth at over 24-25 per cent and margin compression much less as banks raised lending rates in August and bond yields have also firmed up relative to last year, Merrill Lynch said.

Robust growth in core fee revenues and benign cost increases are expected to offset the sharp contraction in trading profits also leading to a rise in operating earnings estimates, the report said.