Private Banks Q4 preview: Rise in bond yields may dent income; NPA nos eyed

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Analysts believe that the truer impact of Covid-19 as regards NPAs could be visible in the quarter even as banks may be tempted to remain prudent due to the second wave of coronavirus


Private banks | Earnings growth | India Inc earnings

A seasonally strong quarter in terms of credit disbursal, along with a pick-up in economic activity is set to aid private banks’ earnings in the March quarter of financial year 2020-21 (Q4FY21). However, while the year-on-year (YoY) report card may show a stellar improvement, courtesy low base effect, sequential performance may be largely flat as the sector grapples with a second wave of Covid-19.

Analysts believe that the truer impact of Covid-19 as regards non-performing assets (NPAs) could be visible in the quarter even as banks may be tempted to remain prudent while creating provisions due to the second virus wave.

“As the Supreme Court’s stay on NPA recognition stands withdrawn, lenders would recognize actual NPAs, which would keep slippages/asset quality elevated, though the pace of formation is likely to moderate,” notedbrokerage house Motilal Oswal Financial Services in its earnings preview report.

Although overall trends in asset quality have fared better than expectations, the recent surge in Covid-19 cases and the fear of a lockdown in key districts would keep us watchful on asset quality, it added.

Concurring with the view, Kotak Institutional Equities observed that lenders would take a call on creation/utilization of new provisions based on health of individual portfolios as well a view on near-term recovery prospects.

“NPA trends for Q4FY21 will reflect combined effect of large corporate resolutions in recent weeks, especially in steel and infra sector, and lifting of SC-standstill on NPA recognition. As a result, loan loss provisions would be rather difficult to predict as Q3FY21 pro-forma slippages would see some recoveries which will be offset by fresh slippages in Q4 and write-offs of older bucket NPA,” it said.

To quantify, analysts at ICICI Securities expect a deviation (on the upside) of up to 1.5 percentage points from pro-forma NPAs recognised during the December quarter (Q3FY21).


“We anticipate incremental non-annualized slippages of 1.0-2.5 per cent (over 9MFY21 pro-forma) primarily flowing in unsecure retail, CV segments etc thereby, driving NPAs sequentially up. Corporate stress recognition, that was almost non-existential in 9MFY21, might also resurface in Q4,” it said.

Low treasury income to dent profits

The yield on the 1-year G-Sec, which was on a downtrend since Q4FY20, jumped around 40 bps in Q4FY21. This, analysts at Kotak Institutional Equities (KIE) fear, may dent treasury income for most banks in the quarter under study.

That said, growth in fee income is likely to be higher on a sequential basis as optimism on economic recovery supports higher disbursements. Besides, non-interest income could also be supported by higher recoveries from write-offs.

Overall, the brokerage expects the aggregate net profit of private banks under its coverage (which includes nearly all the banks)to soar 55 per cent YoY to Rs 16,970 crore, but dip 4 per cent QoQ.

Those at Prabhudas Lilladher, meanwhile, project a 119 per cent YoY growth in PAT for the eight private banks under its coverage. Sequentially, it expects PAT to increase by 4.3 per cent led by Axis Bank (75.5 per cent QoQ growth) and IndusInd Bank (12.5 per cent QoQ growth).

Credit growth and NII

Loan growth is likely to pick up, led by rising consumer demand, particularly in the retail segment. Growth in the corporate segment, meanwhile, is recovering with the focus on lending to highly-rated corporate.

Against this backdrop, analysts at MOFSL expect loans of private banks to grow by 11 per cent/17 per cent over FY21E/FY22E, and estimate Axis Bank and ICICI Bank to deliver 7.1 per cent and 13.5 per cent YoY loan growth, respectively over Q4FY21.

Nirmal Bang Institutional Equities expects the loan growth of individual banks to remain in the range of 16 per cent YoY (Bandhan Bank) to 1 per cent (DCB Bank). It pegs Axis, HDFC, and ICICI Bank’s loan growth between 8 per cent and 14 per cent YoY.

Penciling-in a 12 per cent deposit growth rate (aggregate), analysts at Prabhudas Lilladher and MOFSL forecast a 15 per cent YoY growth in net interest income as cost of funds have been moving on lower side helping NII growth be better than loan growth.

“Robust current account-savings account (CASA) accretion, benefit of deposit cost, shift in portfolio mix towards retail and release of liquidity buffer would offset adverse impact of interest income reversal, credit to deposit (CD) ratio moderation. Consequently, net interest margin (NIMs) are expected to remain stable,” noted ICICI Securities.

Antique Stock Broking, however, expects some moderation in NIMs as banks reverse interest income of 3-9 months post SC’s verdict.

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