Banks’ Q1 to be sober on growth, but troubling on asset quality
PremiumAnalysts have also upgraded earnings-per-share estimates for FY22, albeit by a small margin, keeping in mind the impact of the pandemic
Banks may begin FY22 on a sober note with subdued loan growth and wobbly asset quality following the second wave of the pandemic. That said, the fiscal first quarter may perhaps be the ugliest as analysts expect a gradual improvement in both growth and asset quality for the rest of this financial year.
The share performance of banks so far reflects this optimism. The Nifty Bank index has gained 8.1% compared with a 7.4% rise in the broader Nifty.
Analysts have also upgraded earnings-per-share estimates for FY22, albeit by a small margin, keeping in mind the impact of the pandemic.
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Investors would look for confirmation of such expectations from the management commentary of banks, according to analysts.
As such, most lenders had flagged risks from the second wave on their performance. Guidance on loan growth and asset quality were sober, although banks reiterated that provisioning is enough to protect against such risks.
For the June quarter though, loan book growth may show a sequential drop and for many lenders, even a contraction. A comparison with the June quarter of FY21 would be futile given the severe impact of the nationwide lockdown at the time. Most banks may report a healthy loan growth and even an improvement in bad loan ratios. However, these would be just optical relief.
Within the banking industry, analysts expect a divergence in the performance among lenders. Those at Kotak Institutional Equities said large banks may report better operating metrics compared with their mid-sized and small peers. “We don’t expect a material difference in business performance between private and public banks in this quarter," Kotak analysts wrote in a note.
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What will differentiate banks is their asset quality. Analysts expect an increase in slippages given that forbearance on asset recognition has ended.
“Asset quality would be under watch as the impact of the second wave would keep slippage/credit cost elevated. Slippage is likely to be driven by retail/SME loans, which could also result in higher restructuring," analysts at Motilal Oswal Financial Services wrote in a note.
Large corporate borrowers have been able to withstand the impact of the second wave.
That said, recovery from legacy bad loans is key to reduce the pile of stressed large corporate loans. Given that public sector banks have a large share of such legacy accounts, asset quality indicators would continue to be worse off than private sector banks.
High provision coverage ratio would also make stronger banks stand out.
Analysts expect large lenders such as ICICI Bank, State Bank of India, Bank of Baroda and HDFC Bank to show superior operating performance owing to proactive provisioning.
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