Pick-up in the economic activity and buoyant loan growth during the festive season is expected to boost earnings of private banks for the December quarter of financial year 2020-21 (Q3FY21). Among the pack, mighty banks such as HDFC Bank and ICICI Bank, however, are expected to outperform their peers, analysts say.
That said, key factor to watch out would be the quantum of actual debt restructuring reported by the banks after the Reserve Bank of India’s (RBI’s) deadline to sanction the resolution plan ended on December 31, 2020.
“Q3FY21 will be another quarter where the sector will be influenced by regulatory and environmental factors. So far, the standstill on non-performing assets (NPAs) recognition (due to the Supreme Court’s orders) continues and, hence, asset-quality is likely to be stable; the actual picture is yet to emerge fully. Thus, we will have to depend on pro forma NPAs, the pipeline of fresh restructuring of loans, and collections efficiency, which are likely to dominate the commentary during Q3,” wrote analysts at Sharekhan.
NII and profit expectation
Analysts expect private banks’ net profit (profit after tax or PAT) to rise anywhere between 7 per cent and 20 per cent on a year-on-year (YoY) basis for the quarter under review. Motilal Oswal Financial Services (MOFSL), however, remains an exception and forecasts PAT to be flat as it believes provisioning could continue to weigh on earnings.
“Higher credit cost, coupled with suppressed credit growth, is likely to put pressure on near-term earnings… We estimate private banks to report operating profit growth of around 18 per cent YoY (over 4.4 per cent QoQ), and PAT to remain flattish YoY (around 2 per cent QoQ decline),” it said in its earnings preview note. The brokerage has AU Small Finance Bank, Axis Bank, HDFC Bank, ICICI Bank, Bandhan Bank, and six other private banks under its coverage.
Antique Stock Broking, meanwhile, projects net interest income (NII) growth of nearly 14 per cent YoY, operating profit growth of 13 per cent YoY, and PAT growth of 7 per cent YoY. Large banks like Kotak Bank, HDFC Bank, and Axis Bank are expected to deliver strong earnings, it noted.
As regards net interest margin (NIM), data collated by IDBI Capital suggests that banks have not cut deposit rates while MCLR cut has been in the range of 5-10bps. This, the brokerage says, could put pressure on the margins during the quarter.
“However, higher liquidity on the balance sheet observed during Q2FY21 is expected to decline during Q3FY21 which could support the NIMs,” it said.
With festive season kicking-in along with the pent up demand, business momentum improved during the quarter. In this backdrop, analysts expect overall loan disbursal to improve in single digits on a sequential basis during Q3FY21.
“While consumer sentiment has improved, wholesale lending remains muted. Growth is driven by a secured retail book as banks remains cautious of higher stress in the unsecured portfolio. Thus, we expect private banks’ loans to grow 9 per cent/16 per cent over FY21/FY22,” said a note by MOFSL.
Noting that HDFC Bank and IndusInd Bank reported over 15 per cent and flattish yearly growth under their quarterly business update, the brokerage now expects Axis Bank and ICICI Bank to deliver 8.1 per cent and 6.6 per cent YoY loan growth, respectively over Q3FY21.
Analysts at Sharekhan opine that even though overall credit growth has been weak on system levels, at around 5 per cent on year, larger and well-placed banks such as HDFC Bank and ICICI Bank are expected to report better advances growth, indicating market share gain.
Debt restructuring, asset quality to be tracked
Sector experts continue to remain watchful of asset quality as the bulk of the stress is likely to be recognized over H2FY21. Besides, analysts believe that stress recognition, after moratorium 2.0 was lifted on September 1, is likely to be recognition of four months which may keep slippages elevated.
Slippages, along with restructured assets, will be the key figures to be watch for any upgrading or downgrading of financial estimates, said IDBI Capital’s report, adding that banks could utilize provisions kept against Covid-19 impact during H1FY21 as slippages will be higher and minimum 10 per cent provisions required for restructured assets.
As regard debt recast, Edelweiss Securities notes that leading private banks have hinted at low single digit restructuring number. Therefore, the brokerage suspects that smaller peers will not be in a position to drift much, “even if higher restructuring, especially in some parts of retail/ SME loans, may have been in their long-term interest”.
“This means that for the sector as a whole, asset quality headlines in the quarter will be benign. We also expect players like ICICI Bank and Axis Bank to slow down their prodigious Covid-19 provisioning run rate as the situation on the ground improves, boosting their earnings trajectory,” it said.