Banks' profitability to remain subdued; margin pressure likely

Bad loans to stay at elevated levels

Banks may see some improvement in their results, after taking a huge hit on the balance sheet in the previous quarter. However, the first or June quarter of this financial year is not expected to be any better than the previous one, which saw a huge dent in profitability, as bad loans surged.

UNDER STRESS

• For most banks, credit costs will continue to strain profitability
• Industry credit growth has improved, still it hovers around multi-year lows
• Listed public banks posted a net loss of Rs 17,671 crore for 2015-16
• Net profit of these banks was Rs 36,349 crore for 2014-15
• Analysts say banks with high retail exposure are likely to post better numbers
• Brokerage houses say lenders may see some pressure on net interest margins

“For most banks, credit costs will continue to strain profitability, albeit lower than the trend witnessed in the second half of FY16. We expect Q1 FY17 to be another soft quarter characterised by slower revenue momentum and higher credit costs . Industry credit growth improved, but still hovers around multi-year lows and will continue to pressurise banks’ top line growth, especially for corporate-heavy PSU banks,” said a research report by Edelweiss.

A report by Kotak Institutional Equities said it expects banks to report 40 per cent year-on-year decline in earnings on the back of weak revenue growth of seven per cent (y-o-y) and elevated provisions. Collectively, the listed public banks posted a net loss of Rs 17,671 crore for 2015-16 against a net profit of Rs 36,349 crore for 2014-15.

Analysts say that banks that have a high retail focus are once again likely to post better numbers as compared to banks that have a bigger wholesale book. This is because slippages from restructured book into non-performing assets (NPAs) may continue, as a result of which both NPA and provisions are likely to remain high for these banks. Overall, private sector banks are expected to be once again on stronger footing, as compared to the public sector banks (PSBs) which still remain saddled with huge bad loans.

Brokerage houses also believe that lenders may see some pressure on net interest margins (NIMs), which will also not augur well. Low or flat NIMs in turn will also mean not a very impressive net interest income (NII) for lenders.

“With no base rate cuts for the quarter and average deposit rates declining, we should see banks reporting flattish NII (q-o-q/y-o-y),” said the Kotak report.

However, banks may see some respite on profitability as the non-interest income may see an uptick due to a boost in treasury gains as a result of the lower interest rate regime.