Q1 earnings preview: Credit and income growth to moderate for banks

Brokerage houses believe like in earlier quarters, private banks will be on a much better footing than their public sector counterparts

The first quarter of this financial year (Q1 FY15) is expected to turn out to be tepid for the banking sector in terms of credit and overall income growth, brokerage houses and analysts have predicted.

While the worst might be over for asset quality, pressures persist due to a long spell of low growth. Bond yields softened in the April-June  quarter but were not significant enough to boost treasury income.

“Q1FY15 is expected to be a seasonally weak quarter for credit growth (sectoral average up 14 per cent year on year, flat over the quater) while cyclical factors will take time to drive growth,” said Nilesh Parikh of Edelweiss Securities in a report.

Brokerage houses believe that similar to earlier quarters, private banks will be on a much better footing as compared to their public sector counterparts. HDFC Bank, Axis Bank, ICICI Bank and Kotak Mahindra Bank were the top picks in the private sector space, by analysts. Within the public sector banks (PSBs) space, brokerage houses are betting on Punjab National Bank, Bank of India and Bank of Baroda.

Despite the fact that banks have managed to bring down bad loans and have succeeded in keeping them under check, concerns continue to remain on the restructured assets.

Jignesh Shial, analyst at IDBI Capital said, “the weak asset quality trend may stay for a couple of quarters; however, we expect fresh slippage ratio to ease gradually. On the provisioning front, we expect the quantum of charge on profitability to decline in the coming periods. But our key cause of concern is about fresh lending to existing restructured accounts, which would further classify as additional restructuring and may attract higher provisioning charges.”

According to CRISIL, the slower credit growth in the first quarter is expected to lower the growth in total income for private banks to 14-15 per cent in the quarter ended June as compared to 17.5 per cent in the same period in the last financial year. On account of similar reasons, even the state-owned lenders’ overall income growth is expected to slow down to 11-12 per cent as compared to a 14 per cent increase in the previous quarter.

But the rating agency expects the net interest income or the difference between the interest earned and interest expended for private banks to improve by 15-16 per cent as the lenders will be able to raise their base rate in response to the rising cost of funds. For the PSBs, it is expected to remain in the range of 9-10 per cent.

Anish Tawakley of Barclays said that another factor that could impact the PSBs’ profit after tax growth is the significantly lower treasury income growth as compared to the last year. Experts believe asset quality improvement for banks might take another one-two quarters.