PSBs Q4 preview: Bond yields may dent treasury income; asset quality eyed

Public sector banks (PSBs) may surprise the Street with a healthy March quarter (Q4FY21) numbers as muted earnings in the previous year, lower provisioning in this quarter, and resolution of key accounts may support the earnings, say analysts. However, relative to their private peers, PSBs may have to take a sharper knock as regards the refund of interest on interest (loan moratorium case), which may dent their net interest income (NII), they fear.

At the bourses, the Nifty PSU Bank index has outperformed on the NSE by surging 23 per cent during the quarter under review as against a 5 per cent rally in the Nifty50 index, ACE Equity data show.

Net profit expectation

Analysts are bullish on the PSBs’ bottom lines on the back of favorable base on NII, a seasonally higher fee quarter, and some recoveries from Bhushan Power. Global brokerage Nomura, for instance, expects State Bank of India (SBI) and Bank of Baroda (BoB) to cumulatively report a 233 per cent year-on-year improvement in net profit at Rs 10,232.2 crore, while those at HSBC expect the cumulative PAT of both the banks to rise over 100 per cent YoY.

Among domestic brokerages, Kotak Institutional Equities (KIE), which tracks a total of five PSBs including SBI, BoB, and Canara Bank, expects the aggregate PAT of banks under its coverage to rise by 142 per cent YoY. This would be driven by a 240 per cent yearly growth in BoB’s profit, over 100 per cent growth each in SBI and Canara Bank, and Punjab National Bank’s profit in Q4FY21 as against a loss in Q4FY20.

Spoiling the party, analysts say, could be rise in bond yields that may lower the treasury gains. “The 10-year bond yield rose 30bps while the 5-year and 1-year yields climbed 92bps and 35bps, respectively, on a QoQ basis. We expect banks to book lower sequential gains though state banks have the leeway to book unrealized gains on held-to-maturity (HTM),” notes Elara Capital.

Analysts at KIE peg BoB’s treasury income at Rs 128 crore, down from Rs 925 crore in Q3FY21. For SBI, Canara Bank, and PNB, the same is pegged at Rs 636 crore, Rs 347 crore and Rs 649 crore, respectively, compared to Rs 959 crore, Rs 1,509 crore, and Rs 1,243 crore reported in the December quarter.

Loans and NII

At the industry level, analysts at Emkay Global have estimated a credit growth of 7 per cent YoY and 4.6 per cent QoQ in Q4FY21 for banks under their coverage for the period under review. “Our channel checks and discussions with managements suggest continued healthy traction in mortgage, car, tractors and cards business, while commercial vehicle (CV) and personal loan (PL) remain sluggish,” the brokerage said.

Individually, Prabhudas Lilladher estimates 7 per cent YoY growth in SBI’s loan book at Rs 24.88 trillion, 42 per cent YoY growth in PNB at Rs 6.7 trillion, and 6 per cent YoY growth in BoB at Rs 7.31 trillion.

Factoring-in a 10-12 per cent yearly improvement in deposits, NII is likely to grow 33 per cent YoY on an aggregate basis for the above mentioned banks, the brokerage believes. Of these, PNB’s NII may rise over 80 per cent YoY while that of SBI and BoB may advance up to 27 per cent on year.

“Net interest margin (NIM) will decline QoQ for all banks, but more for public banks, due to refund of interest on interest. In addition for state banks, NIM will also decline from reversal of interest on proforma NPLs,” Elara Capital pointed out.

Asset quality trends

Despite the final Supreme Court judgement in the loan moratorium case lifting the freeze on NPA classification, Nomura expects a positive picture on asset quality.

“While lenders are likely to paint a positive picture on asset quality, the mix of SMA 0-2 buckets will be critical. However, it’s fair to remind investors that year-ends typically suppress SMA-2 and increase SMA-0. The position on restructured loans and disbursement under ECLGS will also be important,” it added.

Those at Elara Capital further highlighted that restructuring in the quarter may be lower than the proposed restructuring that banks had disclosed in Q3 as a few corporate have opted out.

“We believe Shapoorji, Future Retail, SREI group, Vodafone Idea are the only four large corporate accounts under stress of which Shapoorji has been restructured while the deadline for Future Retail ends in April. Recovery of Bhushan Power and a few other smaller NPLs will aid earnings of state banks,” the brokerage added.

HSBC would track growth outlook and asset quality performance going-forward, as a fresh surge in Covid-19 infection rates and large states imposing activity restrictions may hamper economic recovery.