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Q1 earnings preview: Banking sector will take some more time to revive

While there is no clear trend for the sector as a whole, the quarter may be in favour of private banks

Siddharth Purohit 

Bank
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After a tough FY18, the beginning of the financial year 2018-19 (FY19) was expected to be a better one for the banking industry. However, with the Reserve Bank of India (RBI) starting to tighten policy rates, the sector might take some more time to revive.

The credit growth, according to the RBI, has improved for the system at 12.3 per cent for the first two months of FY19 compared to 9.8 per cent growth seen in Q4FY18. While the system-wide growth has picked up, a number of have had constraints in lending. The space vacated by is likely to be filled by private banks. Hence, growth for this quarter will also be driven by private lenders.

are expected to grow their advances in the range of 15-20 per cent, while except for few PSU banks, others might see either flat or de-growth in their balance sheet. Retail will also be the growth driver, given that the corporate borrowings are still not in the mood to borrow and go for large

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With withdrawing all the restructuring schemes, banks had to recognize a large pool of outstaying restructured loans as non-performing assets (NPAs). While this has added to the gross NPAs (GNPAs) in the system, it has also brought in a lot of clarity on the outstanding stress pool of banks.

The GNPAs for the industry increased by Rs 1.38 trillion from Rs 8.79 trillion to Rs 10.16 trillion. Of this, incremental NPA additions at 85 per cent came from the and the consequent provisions have weakened the capital positions. However, for the first quarter of FY19 (Q1FY19) the addition to NPAs is expected to slow down as large part of the troubled pool was recognized in the previous quarter. However, in absolute terms, it still will remain high for

While incremental NPA additions are likely to cool off during the quarter, the ageing related provisions and elevated bond yields will keep the provisions higher for most PSU banks. Hence, we don’t expect improvement on the bottom-line front.

Among individual stocks, Bank is likely to report 20 per cent loan as well as profit after tax (PAT) growth backed by strong retail led lending and lower credit cost. On the high yielding personal loans and credit card side, Bank remains a formidable player and the growth in this segment should help in maintain net interest margin (NIM). IndusInd Bank, on the other hand, is also likely to have a strong quarterbacked by commercial vehicle, tractors and car loans segment, in addition to its corporate loans where it has been growing selectively. It, too, should grow by 20 per cent at level.


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Meanwhile, ICICI Bank has been downsizing its overseas loan portfolio, hence overall business growth could be a moderate 10 per cent. On asset quality side, NPAs could still go up during the quarter. On a relative basis, the valuations for the bank at 1.1x for FY20 book value leaves little for downside. However, the ongoing leadership crisis still will be a hangover on the stock.

Axis Bank has largely cleaned up its book during the fourth quarter of FY18 (Q4FY18). It had an outstanding stress pool of Rs 88.61 billion and hence, slippages during the quarter will be much lower than previous quarters.

So to conclude, while there is no clear trend for the sector as a whole, the quarter will be in favour of private banks and our top picks are Bank, IndusInd Bank and Axis Bank in the private space and Vijaya Bank in the PSU space.


Siddharth Purohit is research analyst at SMC Institutional Equities.

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

First Published: Thu, July 19 2018. 09:54 IST
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