The stress on state-run banks’ earnings might not have eased in the just concluded October-December quarter, as deteriorating asset quality, higher provisioning requirement and muted loan demand are expected to cap their profit growth.
Private lenders are likely to fare better due to relatively low credit quality risks, improvement in margins and growth in fee income.
“Our private banking universe is likely to grow faster, while public sector banks (PSBs) under our coverage are likely to grow at a subdued pace. We reiterate our cautious stance on the PSB space in the near term, on the back of a deteriorating macro environment,” Saday Sinha, vice-president, Kotak Securities, wrote in his note to clients today.
Senior executives with state-run banks insist delinquencies in loan portfolios did not escalate in the past three months. However, they admit that provisioning during the third quarter will remain high, as they have to set aside additional funds against restructured accounts, in line with new norms.
“We have made substantial headway in recovering money from some of the non-performing accounts. Our asset quality has not worsened significantly. But we had to make higher provisions on restructured accounts. So, provisions will continue to remain high,” an executive director with a public sector bank said, requesting anonymity as he was not authorised to share earnings details before these were publicly announced.
Sector analysts had a similar view. “While slippages should have come off the sharp peaks of the second quarter, they are likely to remain elevated. Restructuring activity also likely remained high. Given the need to rebuild coverage ratios and create additional restructured loan provisions, the provision charge remained high, on our estimates,” said Anish Tawakley, analyst with Barclays.
Several state-run lenders had witnessed a dip in their profits during the July-September quarter, due to high provisioning.
According to analysts, muted loan demand is likely to restrict expansion of banks’ net interest income.
| EARNINGS GROWTH: PRIVATE BANKS PIP GOVT-LED COUNTERPARTS | ||||||
| In Rs crore | SBI | BOB | PNB | ICICI Bank | HDFC Bank | Axis |
| NII | 11,521 | 3,035 | 3,830 | 3,558 | 3,911 | 2,479 |
| % chg y-o-y | - | 14.3 | 8.3 | 31.2 | 25.5 | 15.9 |
| NIM (%) | 3.5 | 2.7 | 3.4 | 3 | 4.7 | 3.5 |
| Bps chg q-o-q | - | 10 | - | 10 | - | - |
| Net profit | 3,492 | 1,156 | 1,107 | 2,122 | 1,860 | 1,265 |
| % chg y-o-y | 7.0 | -10.3 | -3.7 | 22.8 | 30.2 | 14.8 |
| Source: Motilal Oswal Securities | ||||||
“Earnings growth of PSBs is expected to be soft, due to modest net interest income and higher provisions on restructuring, partially offset by improved treasury performance,” said Nilesh Parikh, analyst with Edelweiss Securities.
Most analysts remained positive on private sector banks and expect these lenders to deliver a steady quarter, led by benign asset quality and stable to improving net interest margins.
“The overall performance of private banks is likely to remain better than public sector counterparts," said Alpesh Mehta, analyst with Motilal Oswal Securities.
While Angel Broking expects private banks’ earnings to grow 21.7 per cent from a year earlier, for state-run lenders it sees only a 2.5 per cent year-on-year growth.
Most analysts felt private lenders had been able to expand margins and grow their fee income in the October-December quarter.
“Although many PSBs are still trading below the average trading multiple, we believe the near-term outlook remains challenging for the stocks, on the back of a high share of stressed assets, along with a relatively lower coverage ratio. We prefer private sector banks, which have higher retail focus, with lower asset quality overhang,” said Sinha of Kotak Securities.
