Poor Show Last Year May Make Banks’ Q3 Earnings Look Better
What to expect from banks’ earnings in Q3FY17?
Banks are expected to report a strong earnings growth in the October-December quarter despite a slower loan growth and higher delinquencies. The Reserve Bank of India’s 90-day relief on recognising bad loans could mask the negative impact of demonetisation on revenue growth and provisions.
State-owned lenders could earn better returns from their investments as yields on government securities fell during the quarter.
We expect earnings growth for our coverage banks to remain muted. However, an extremely benign base of PSU banks (Q3FY16 was the first quarter of RBI’s asset quality review) will make sectoral earnings growth to look optically strong at 80% y-o-y.Antique Stock Broking Q3FY17 Results Preview Report
The aggregate net interest income of 10 widely tracked private and government-owned banks is expected to grow 8.8 percent in Q3FY17, show estimates compiled from Bloomberg. Their aggregate net profit is expected to rise at a faster 99.3 percent as compared to the corresponding quarter last year, largely on a low base -- RBI’s asset quality review had led to higher provisions and huge losses last year.
The 10 banks include HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, State Bank of India, Canara Bank, Bank of Baroda, Punjab National Bank and Bank of India.
Treasury Gains To Lend Support
Banks are expected to see higher gains on their investment and trading portfolios given the 30-basis-point fall in the G-Sec yields during the quarter to 6.515 percent, which will support earnings growth. A basis point is one hundredth of a percentage point.
Treasury gains should contribute ~70-120% of PBT for PSU banks (except BOI) and 7-60% of PBT for private banks.Deutsche Bank Report On India Financials
Our interactions with banks indicate that they have realized high trading gains/are sitting on high MTM (mark-to-market) gains on investment portfolios.Motilal Oswal Report On Financials
Demonetisation Hurts Demand For Loans
Credit demand collapsed to a multi-year low in December as retail loan growth, the key driver in 2016, moderated due after demonetisation of high-value currency notes on November 8. According to a Motilal Oswal report, quarter-to-date loans declined 4 percent driven by multiple factors such as:
- a large part of the branch bandwidth was engaged in deposit collection
- demand for working capital loans was weak due to economic disruption
- banks took a cautious approach on lending to small businesses and microfinance institutions and loans against property
- investment sentiment was weak due to uncertainty
- Foreign currency non-resident (bank) deposit-related loans came up for redemption
- repayments from loans completing the restructuring moratorium were higher
However, there could be some benefit to banks from the shift in the market share from unorganized to organized credit.
Margins To Remain Stable
Banks’ spreads are seen remaining stable during the quarter on account of the huge influx of deposits in current and savings accounts, lowering cost of funds. This should offset the negative impact on margins from deploying excess cash in low-yielding treasury instruments due to lack of credit demand. Moreover, banks’ deposit rate cuts came in late November while they started lowering lending rates only in January 2017, which would support margins.
As a one-off, fee income is likely to be weak (on waived ATM charges, merchant discount charges on debit cards and lower processing fees) and operational costs are expected to be higher, led by demonetisation-related currency management costs.
Asset Quality To Remain Steady
Indian banks are unlikely to see any significant changes in the reported bad debt numbers from the September ended quarter as loans up to Rs 1 crore got a temporary repayment relief from the RBI, while some small borrowers prepaid in old currency notes. The year-ago quarter had seen higher provisions driven by RBI’s clean-up drive.
Fresh slippages for government-owned lenders are expected to remain at elevated levels as corporate stress continues, but should decline compared to the second quarter.
Falling interest rates would improve resolution of stressed corporate loans. Management comments on loans to SMEs and agriculture sector, along with the accounts on watch list, would be keenly tracked to understand the outlook for bad loans and recoveries post Q3FY17.
Banks That Are Likely To Outperform
Government-owned banks are expected to fare better than their private peers.
Bank of Baroda and Bank of India are expected to report a net profit for the quarter compared to a net loss of Rs 3,342 crore and Rs 1,506 crore, respectively, in the year-ago comparable quarter. Punjab National Bank is expected to see a huge jump in its bottom line number, given its Rs 51-crore profit last year. For State Bank of India, stake sale in its life insurance business will boost profit numbers in the quarter.
Corporate-focused private lenders ICICI Bank and Axis Bank could see a decline in their profit growth as they continue to witness slippages from their respective watch lists (although at a slower pace), warranting higher provisions. ICICI Bank had recorded gains from a stake sale in ICICI Prudential Life in the year-ago quarter, so it will see a negative base effect playing out.
The Nifty Bank index underperformed the broader Nifty50 in the October-December quarter, declining 5.75 percent as compared to a 4.94 percent fall in Nifty50.
Post the Q3FY17 earnings, markets are likely to focus on the banks’ outlook for earnings and asset quality post the third quarter when the cash situation improves and RBI’s relaxation on repayment expires.
(These expectations have been compiled from reports of Credit Suisse, Jefferies, HSBC, Deutsche Bank, Motilal Oswal, Antique Stock Broking and Kotak Securities.)