Wage, NPA to weigh on state-run banks' profit

Retail loans to aid growth of private lenders

For yet another quarter, the divergence in financial performance among government-owned banks and their private counterparts is expected to continue. While public sector banks (PSBs) will see pressure on their bottom line from higher provisioning for wages and pensions, apart from impaired assets, private lenders' growth will be driven by healthy growth in retail loans.

"The performance of state-run and private banks is likely to show divergent trends. While PSBs' slippages will remain high for the next one to two quarters, we expect private players to fare well," said Edelweiss Securities.

PSBs, which share higher burden of non-performing assets (NPA) and restructured loans compared to private lenders, have seen their profitability under pressure in the last financial year.

Analysts say, the April-June quarter will also see muted credit growth and higher slippages.

"Credit growth has moderated further to 13.6 per cent, year-on-year, (as on June 14) compared to the 14-15 per cent range reported during four previous fortnights. PSBs would continue to disappoint on asset quality while private banks are likely to report higher delinquencies albeit on a low base," said Saday Sinha, analyst with Kotak Securities.

Analysts pointed out that higher pressure on provisioning will also come as debt recast proposals of some borrowers have been rejected by the corporate debt restructuring cell, which will mean banks will have to classify these as sub-standard. Such assets attract provisioning of 15-20 per cent, depending on whether the loan is secured or not.

Private banks, on the other hand, are expected to have a steady quarter led by benign asset quality and stable NIM backed by healthy loan growth from retail sector.

NIM, the difference between interest income and interest expended, is expected to decline for PSBs as credit pick-up stayed muted.

"Most government banks will see year-on-year decline of 10-20bps, barring the State Bank of India, which, may see a decline of 30-35bps, as margins peaked in the January-March quarter," said Bank of America Merrill Lynch in a note to its clients.

Among private banks, IndusInd Bank and Axis Bank may show 25-40 bps margin increase, on the back of capital raising. According to analysts, many PSBs have started making ad hoc wage revision provisions and linked to that revision in pensions/ gratuity.

"While a few of like State Bank of India, Punjab National Bank and Oriental Bank of Commerce, are doing at the rate of 13-15 per cent, many like Bank of Baroda and Bank of India have done until the March quarter at the rate of five-seven per cent. We think banks with low wage revision provisioning will scale up the rate and hence we believe opex (operational expenditure) costs related to staff will jump quarter-on-quarter," said the BofaML report.

The silver lining for the banks will be from treasury gains on the back of softening bond yields.Yield on the 10-year benchmark government bond declined by around 50 bps in the April-June quarter. The softening of yields will help the PSBs see a huge gain and writebacks on the bond book due to longer duration of available for sale (AFS) portfolio and a relatively higher share of AFS book.

"The contribution from non-interest income is expected to remain high, driven by strong treasury gains as the recent decline in yields offers comfort," said Kotak Securities. However, core fee income is likely to remain subdued due to weak loan growth and we are yet to see any signs of a turnaround on fresh loan sanctions.