Banks will get relief from growth, bad loans in the second quarter

At the aggregate level, both public sector banks and their private sector peers may report a jump in net profit as the need to make higher provisioning would have been reduced. With the recovery from Dewan Housing Finance Corp Ltd (DHFL) account, the lenders will get a big boost in income. Analysts expect a gradual improvement in almost all indicators from credit growth to gross bad debt ratio. Looking at the base effect, a comparison with a year ago period would show a better metric. “For the banks we cover, we see a rebound in profit (20% year-over-year and quarter-on-quarter) in core earnings with a combination of moderation in pick-up and credit costs. We see NII (net interest income) growing at 7% yoy and 3% qoq and, more importantly, fees increasing by 17% yoy and 9% qoq, driven by growth in the lending and cross-selling businesses. reflecting generalisations,” wrote analysts at Jefferies India Pvt Ltd.

Post-pandemic NII growth has been badly hit due to escalation in stress and fall in loan disbursements. Despite the improvement in the second half, most banks reported low NII growth for FY21. The trend extended to the June quarter of 2021 due to restrictions imposed during the second wave of the pandemic. However, loan disbursements, especially retail, have shown a comeback during the September quarter. As of August, retail credit growth to the banking system stood at 12.5%, higher than the overall credit growth of 6.7%, according to Reserve Bank of India (RBI) data.

Buoyed by festive season demand, banks are likely to see further improvement in the remaining quarters. HDFC Bank Ltd., Bandhan Bank Ltd. and IndusInd Bank Ltd. have reported improvement in credit growth. This will translate into a strong recovery in core interest income growth.

Another factor helping core earnings growth will be stable margins. Banks’ deposit rates have come down with a sharp drop in cost of funds with most lenders. Analysts expect private sector banks to show more improvement in net interest margin than public sector banks. This is because private sector lenders maintain higher levels of lending rates on a weighted average basis than their public sector counterparts.

The result is that the NII growth of private sector banks will be better than that of public sector banks. Given the growth in other fee-related businesses, banks can expect decent growth in non-interest income as well. This brings us to asset quality, which is another important factor determining the profitability of banks. Analysts here expect some relief for lenders, though it is likely to be limited. Collections have improved sharply for most lenders, which bodes well for bad debt ratios. The restructured debt pile may also remain stable.

That said, lenders who have investments in credit group companies may find it difficult to keep their provisions under control. As such, most banks have termed the loans given to the group during the quarter as bad. The special thing is that the tension among small businessmen has hardly reduced. Thus, it can be difficult for small businesses to find high-risk banks.

Yet another disadvantage can be vehicle loans. Analysts at Emkay Global Financial Services Ltd said fresh stress formation for vehicle loans, loan against property and microfinance will continue to increase. He said the stress in small business loans would be seen through restructuring.

The asset quality trend for the September quarter could be mixed depending on the extent of exposure of lenders to a weak loan portfolio. Therefore, provisions will vary between lenders. Thus, some banks may choose to make provisions in anticipation of stress in the coming quarters.

The move in banking stocks shows optimism on credit growth and stable asset quality. The Nifty Bank index has gained 10% since July. Shares of big lenders like HDFC Bank, ICICI Bank and Axis Bank have risen. That said, the sector index has underperformed the broader Nifty, which has gained nearly 14%.