Q1 earnings may be muted for banking sector
2 min read . Updated: 12 Jul 2020, 10:52 PM ISTModeration in credit growth and stable net interest margin will keep performance muted, according to Philip Capital
India’s banking sector is likely to see muted first quarter results, as lenders continue to strengthen their balance-sheets through higher provisions against the covid-19 impact. The previous quarter had seen banks, especially private sector entities, increasing provisions to cushion against future asset slippages.
Banks are expected to report 7% year-on-year growth in pre-provision profit, while private banks are to report 11% growth, according to brokerage firm Phillip Capital Pte. Ltd. Moderation in credit growth and stable net interest margin are likely to keep performance muted. Credit growth is expected to moderate to 6.2% in the first quarter compared to 12% in the year ago. This trend is expected to continue because of the impact of the pandemic.
However, treasury income will continue to support profitability in the first quarter, as it offsets weakness in net interest margins and fee income growth. The 10-year government security has fallen 25 basis points quarter-on-quarter.
Stake sales in subsidiaries of State Bank of India and ICICI Bank will also add to higher treasury gains. During the quarter, SBI sold a 2.1% stake in SBI Life Insurance Co., while ICICI Bank sold 1.5% in ICICI Prudential Life Insurance Co. and 3.96% in ICICI Lombard General Insurance Co.
Earnings of public sector banks are likely to be hit because of sluggish loan growth as a result of integration, higher proportion of moratorium, and delay in the resolution of National Company Law Tribunal accounts, according to brokerage firm Motlial Oswal. “Management commentary on moratorium trends under moratorium 2.0 would be the key theme of discussion. Also, the trends in collection efficiency (banks have highlighted improving collection trends over May-Jun’20) as the economy starts to recover would be an important metric to assess the banking system’s health in the near term," it said.
Asset quality will continue to be stable, considering that the second moratorium will end by August-end, according to Phillip Capital. Gross non-performing assets (NPAs) are expected to reduce by 15 basis points to 5.37% in Q1. Credit cost, or the amount set aside for bad loans, however, is expected to be higher, as banks may increase provision coverage ratio and create contingent provisions in anticipation of NPAs after the moratorium ends.
Non-banking financial companies (NBFCs) are likely to see moderation in assets under management (AUM), while housing finance companies are likely to report stable AUM on a sequential basis. According to Phillip Capital, gold-loan NBFCs are likely to see higher growth led by rising gold prices, while asset financing NBFCs will see 50-80% decline in disbursement because of the lockdown. Collection efficiency has improved to 45-70% from 15-30% in April across NBFCs. As a result, the credit cost is likely to moderate over the previous quarter, it added.
Nomura, on the other hand, said housing finance companies could see spreads remaining under pressure given the normalization of bonds yields.
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