Earnings preview: Bank profits to show steady rise despite provisions

Rise in stressed assets may not push bills for provisions as lenders maintain higher provision coverage ratio for few quarters

Listed banks are likely to post over 20 per cent rise in profit in the second quarter (Q2) ended July-September 2021-22 (FY22) on improvement in collections and credit offtake amid pressure of slippages and provisions bill, revealed analysts.
 
Based on analyst assessments, Bloomberg's estimates showed that for 19 lenders – five public sector and 14 private banks -  profit would grow 21.7 per cent to Rs 32,075 crore in Q2 year-on-year (YoY).
 
Domestic brokerage Motilial Oswal also pegged 20 per cent growth in profit after tax for banks under its coverage.
 
In keeping with the gradual economic upturn, the pace of bank credit YoY gained traction. The banking system's credit rose 6.7 per cent YoY in the second half of September, up from 5.6 per cent in March, according to the Reserve Bank of India data.
 
ICICI Securities in a preview said the reporting quarter will be characterised by an uptick in disbursements and collections, with recovery in business activity.
 
Loan portfolio has witnessed gradual accretion all through Q2FY22, with signs of improvement in pockets.
 
While interest income may see limited rise due to slashing of lending rates to mop-up business, banks have continued to benefit from a fall in the cost of funds due to cut in deposit rates.
 
CARE Ratings Associate Director & Head, BFSI Research Saurabh Bhalerao said net interest margins are expected to remain stable with a downward pressure as banks have been reducing deposit rates amidst good liquidity and chasing current account savings account deposits.

Non-interest income for Q2FY22 will see some increase with resolution of a large corporate account, as well as thrust on fee-based income products, including credit cards.
 
Bhalerao said with the absence of a moratorium in the second wave of the Covid-19 pandemic, banks will see a rise in non-performing assets, as well as restructured assets.
 
Under the one-time restructuring (OTR) 2.0, lenders could recast loans till September 2022.
 
Commenting on specific loan pools that may see asset pressures, Motilal Oswal in its assessment said slippages would remain elevated, led by retail and small and medium-sized enterprises. Moreover, restructuring is likely to increase, led by the automobile and microfinance segments, while the corporate segment would remain resilient.
 
The rise in stressed assets may not push bills for provisions as lenders have maintained higher provision coverage ratio for the last few quarters.
 
Bhalerao said most banks have maintained additional provision. While the overall credit cost continues to remain elevated, incremental credit cost may not be significantly higher, he said.
 
Credit cost will subside quarter-on-quarter, but normalisation seems a quarter or two away.
 
Restructuring under OTR 2.0 will continue in Q2FY22 within the guided or anticipated range.
 
With respect to corporate credit, recovery from Dewan Housing Finance Corporation and stress recognition for Srei Infrastructure Finance will keep the trend volatile across banks, according to ICICI Securities.