PSBs may report weak loan growth, NII amid Covid-19 crisis in Q4: Analysts

Growth, asset quality and NPA resolutions remain key metrics to be watched for the entire lending space given uncertainty regarding the return to normalcy amid Covid-19 pandemic, say analysts

As credit growth slumps to decadal low of 6.14 per cent in the financial year 2019-20 amid the coronavirus (Covid-19) outbreak, public sector banks (PSBs), analysts say, may report single-digit sequential growth in the March quarter of FY20 (Q4FY20). Besides, marginal slip in net interest income, steady credit costs could be the other theme across the PSB segment.

"With rate cuts announced in the end and transmission to take effect in H1FY21E, moderation in business growth is expected along with to slight dip in the net interest income (NII) and net interest margin (NIM)," wrote Kajal Gandhi, analyst at ICICI Securities, along with Yash Batra and Vishal Narnolia in a sector preview report.

Among the PSBs under their coverage, which inlcuded State Bank of India, and Bank of Baroda, they expect State Bank of India (SBI) to report NII of Rs 26,956 crore, down 3 per cent sequentially, but a jump of 17 per cent on a year-on-year (YoY) basis. Besides, they see Bank of Baroda reporting a NII of Rs 7,331.5 crore, up 3 per cent QoQ. 

Mona Khetan, analyst tracking the sector at Dolat Capital, says that margins could be stable QoQ for most banks as weak loan growth negates the positive impact of decline in cost of deposits and lower sequential slippages.

According to Khetan, recoveries slated for Q4FY20 could be derailed owing to the outbreak of Covid-19 as a large part of recoveries happen close to end of quarter. Thus, weaker growth estimates and decline in recoveries may push gross NPA ratio upwards on a sequential basis.

"Although, slippages are likely to moderate sequentially led by lower corporate slippages, we expect some residual bank-specific slippages to play out in the corporate space. For PSBs, MSME restructuring under RBI’s scheme, which was extended till Dec-20, could rise," she notes.

Centrum Broking has revised the GNPA ratio estimate upwards for sector leader SBI to 7.3 per cent in FY20, from 6.6 per cent estimated earlier. Lower provisions, lower tax rate, and higher treasury income are likely to support earnings of the PSBs during the quarter under review, say analysts at Kotak Institutional Equities.

Things to watch out for

According to KIE, proportion of loans or borrowers that are under moratorium, likelihood of the same going upwards as customers may selectively choose for a few installments, and steps taken to de-risk the potential default that is likely on account of moratorium are some of the factors that investors need to keep a track of. Analysts at the brokerage would also pay attention to the management's commentary to have greater clarity on economic conditions as the results are declared to help understand the situation on the ground.

Growth, asset quality and NPA resolutions remain key metrics to be watched for the entire lending space given uncertainty regarding the return to normalcy and its likely impact on the sector, say analysts at Centrum Broking.