As the quantum of the impact of coronavirus (Covid-19) remains hazy, analysts expect banks, especially the larger ones, to report stable March quarter (Q4FY20) earnings. This, they say, would be possible due to the Reserve Bank of India’s three-month moratorium on loan repayment, and due to the lockdown being imposed in the second half of March.

"As the shutdown of economic activity was undertaken in the second half of March 2020, the full impact of the fallout will not be reflected in Q4FY20 numbers. In the current uncertain environment, large banks like HDFC Bank continued to report strong growth in advances at 21 per cent in Q4FY20; therefore, it is difficult to quantify the extent of impact on the economy as a whole and financial system, in particular," note analysts at ICICI Securities.

Profitability to take a sequential hit

Owing to higher than expected slippages, Gaurav Jani, sector analyst at Centrum Broking, expects profit after tax (PAT) of large-cap banks to decline by 35 per cent quarter-on-quarter (QoQ) to Rs 7,500 crore in the recently concluded quarter. For FY20, he has cut the PAT estimates for the lenders under his coverage, which includes ICICI Bank, Axis Bank, Federal Bank, and DCB Bank, by 15.6 per cent.

Among large banks, the brokerage sees ICICI Bank’s PAT declining 49 per cent QoQ to Rs 2,100 crore in Q4FY20, followed by a 68 per cent sequential decline in Axis Bank’s PAT at Rs 564.6 crore.

"Banks under our coverage are likely to report net interest income (NII) growth of 15 per cent year-on-year (YoY) led by improving cost of funds and decline in share of bad loans over the previous year. Pre-provision operating profit (PPoP) growth of 25 per cent YoY will partly be supported by higher treasury gains. Profit before tax (PBT) and PAT growth will, however, be sharply higher over the previous fiscal owing to low base and impact of tax cuts," say analysts at Dolat Capital.

Asset quality to be tracked

Despite the RBI’s relaxation on loan repayment, analysts fear the asset quality of the banks could still deteriorate on the back of telecom sector woes and special mention accounts(SMA) being kept out of the purview of the moratorium.

"RBI issued a moratorium for TL/WC loans for loans/interest outstanding on March1, 2020 but this relaxation did not cover the SMA-1/2 accounts. This could lead to a spike in asset quality in Q4FY20E. Asset quality could deteriorate as the stretched earnings impact would trickle in and servicing of over-dues might remain a challenge especially for unsecured loans and self-employed segments like CV operators/SMEs/MFI customers. Consequently, we expect our coverage lenders to report a higher gross non-performing asset (GNPA) of 1.0-2.5 per cent versus our previous estimates which could lead to escalation in provisions by 17.2 per cent," notes Centrum Broking.

In the current scenario, banks with lower proportion of MSME and unsecured retail loans are better placed, say analysts at ICICI Securities, who expect absolute GNPA at around Rs 3,00,173 crore in Q4FY20E, relative to Rs 3,02,886 crore in Q3FY20.

Loan growth, NIMs to remain stable

For Sanjeev Prasad and Sunita Baldawa, research analysts at Kotak Institutional Equities, core performance of the banks could be weak as loan growth has slowed to a five-decade low of 6.14 per cent YoY in FY20, which would put pressure on revenue growth, pointing to decelerating trends in retail-oriented loan books.

"Traction in large corporate loans remained in lower single digits at 2.5 per cent YoY, while higher growth in retail segment at around 17 per cent YoY as of February 2020. However, Covid-19 is seen impacting credit off-take across segments (including retail). Despite this, large private banks - HDFC Bank and Axis Bank may report relatively better credit growth," note analysts at ICICI Securities.