The January-March quarter, the fourth and final one (Q4) of 2017-18, is unlikely to be a pleasant one for the top public sector banks (PSBs).
They are now weighed down by frauds, the new rules from the Reserve Bank of India (RBI) on non-performing assets (NPAs), fluctuation in bond yields and the fluctuating developments in cases before the National Company Law Tribunal (NCLT).
Three major PSBs — State Bank of India (SBI), Punjab National Bank (PNB) and Bank of India (BOI) — would report losses in Q4. The net profit of Bank of Baroda and of private corporate lenders (PCLs) are expected to have fallen sharply.
Higher credit cost (provisioning as a percentage of total advances) has weighed on the bottom line of these banks. While the developments on NPA rules and the NCLT would have long-term benefits to these banks, these would have also led to additional provisioning in Q4. Due to either more slippage or a higher haircut (loan writeoff) in some cases.
Second, the adverse impact on some banks of fraud. PNB is a major victim and will report additional provisioning. “PNB should fare the worst on asset quality as it absorbs the impact of its Rs 135 billion fraud (reported formally in February),” says Emkay’s Q4 result preview. Banks are required to provide 100 per cent provisioning on their balance sheets for any fraud. Also, analysts at Emkay say, Bank of Baroda, PNB, Canara Bank and SBI are likely to be impacted by their exposure to telecom companies which have filed for bankruptcy. This is because banks have to provide 50 per cent for accounts reported under the insolvency law to NCLT.
RBI’s recent decision on allowing banks to spread their mark-to-market (MTM, the revaluing of assets at current prices) loss provisioning by up to four quarters would give some relief to PSBs. “Even as bond yields have increased after Q3 (October-December 2017), the MTM provisioning impact is expected to be softer during Q4, with RBI allowing banks to spread their losses,” analysts at Motilal Oswal have said.
However, PSBs’ and PCLs’ credit cost is expected to remain elevated in Q4. Additionally, RBI’s divergences report could have additional impact on the banks' earnings.
Credit cost apart, tepid corporate credit growth (up only one per cent over a year before, as of February) would also have impacted the performance of PSBs and PCLs. “We expect banks to post muted performance for the quarter (especially the corporate-focused ones), led by high credit cost and slower revenue momentum,” says financial services entity Edelweiss’ Q4 preview report.
For private banks, Q4 should be a brighter quarter, owing to robust retail loan (to individuals) growth (up 20 per cent as of February), stable asset quality and improved margin. “Mid-size private banks would continue to outshine peers, due to continued market share gains, stable asset quality and stable-to-improving margins,” says a Motilal Oswal Securities’ report. HDFC Bank, IndusInd Bank and RBL Bank are expected to report over 20 per cent year-on-year rise in net profit.