PremiumIndia’s banks had a challenging FY21 in the wake of the pandemic, with much of the year clouded by uncertainty on both growth and asset quality. The March quarter metrics may finally throw light on the actual asset quality picture, while headline profitability metrics may depend on how proactive lenders were on provisioning in the previous quarters.
A key factor in growth figures for the March quarter is a low base. Recall that year-ago numbers were impacted by a complete lockdown in the last week of the fourth quarter.
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Premium Lenders typically see a surge in loan growth in the final week of March, which didn’t happen in FY20. Ergo, growth figures of loans and income need to be discounted for this.
Nevertheless, lenders have reported good recovery on a sequential basis and that momentum is expected to have improved.
Early updates by a handful of banks already show that some lenders have been able to recoup business and reach closer to pre-pandemic levels. The country’s most valued lender, HDFC Bank, reported a healthy 13.6% growth in loans, while IndusInd Bank showed single-digit growth compared with a contraction in previous quarters.
Analysts expect the top three lenders to show strong recovery, while mid-sized public sector banks may continue to struggle on this front.
“Given accelerated deposit traction, surplus liquidity and comfortable tier-1 capital, banks are saddled with sufficient ammunition to eye growth," wrote analysts at ICICI Securities Ltd in a note. Those at Motilal Oswal Financial Services Ltd expect loan growth for private sector banks to be higher at around 11%.
A healthy loan growth along with an expansion in net interest margin is expected to buffer core interest income for banks.
However, the Supreme Court’s ruling that banks cannot charge compound interest for loans above ₹2 crore may result in an additional hit for lenders. While in the previous instance, the government had borne the expense of compound interest waiver on loans below ₹2 crore, this time around there is so far no communication from the Centre.
“For the banks under our coverage, this suggests an impact of ₹4,500 crore, or 11% of Q4FY21 estimated earnings or 4% of quarter’s NII. Banks with a higher share of corporate/small and medium enterprises (SME) portfolio will face greater impact," wrote analysts at Kotak Institutional Equities in a note.
What will be of importance is the message from the management of banks in terms of outlook on growth, especially in the wake of the second wave of infections. The second wave has impacted mobility and derailed recovery due to regional lockdowns.
That brings us to the other aspect where banks have taken a big hit on earnings—asset quality.
Artificially depressed in the previous quarters due to forbearance and the judicial standstill, headline ratios of bad loans will now reflect the true stress in balance sheets.
“Corporate stress recognition, that was almost non-existential in 9MFY21, might resurface in Q4FY21 (few legacy accounts). With collection efficiency steadily improving, we expect secured retail and SME slippages to settle relatively lower than Q3FY21," said the ICICI Securities report.
To be sure, many lenders have accelerated provisioning, anticipating stress. This would be the key differentiating factor for investors to gauge future profitability.
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