Private banks stare at washed-out Q1; moratorium, Covid-19 provisions eyed



The nearly washed-out June quarter of financial year 2020-21 (Q1FY21) amid disrupted business activity due to Covid-19 outbreak, along with a seasonally weak period, is expected to polarise private banks’ earnings, analysts say. While business growth may remain weak across the board, profitability will be impacted due to divergent provisioning.


“Larger with sufficient capital, strong granular liability franchises and a reasonable asset quality track record are expected to emerge stronger. However, elevated provisions are likely to persist for some lenders as they may have chosen to fortify their balance sheets,” analysts at HDFC Institutional Equities said in a results preview note.



For Edelweiss Securities, the April-June, 2020 quarter earnings are unlikely to bring forth any big reveal on asset quality, margins or loan growth for lenders. While the moratorium option will ensure nearly invariant asset quality, loan disbursements are likely to be muted, it said in a result expectation report.


Analysts at ICICI Securities, for instance, expect to report a divergence in performance with adequate contingent provisioning, low moratoriums, and secured retail loans reporting steady operating performance.


For the eight under their coverage, including Axis Bank, HDFC Bank, IndusInd Bank, and Bandhan Bank, they see the net profit at Rs 10,504 crore, clocking a growth of just 1 per cent year-on-year (YoY). Those at Nirmal Bang Institutional Equities, meanwhile, expect the net profit to be around Rs 15,620 crore for the 10 banks in their coverage universe, up 23.5 per cent YoY and 77.7 per cent sequentially.


As for net interest income (NII), the brokerage sees the metric at Rs 4.18 lakh crore for the banks under its coverage, growing only 2 per cent quarter-on-quarter (QoQ) but 16.5 per cent YoY.


“Banks have cut deposit rates aggressively, including the savings rate. However, most have become extremely risk-averse in lending. As such, we expect net interest margin (NIM) to decline for most banks by 8-12bps,” note analysts at Elara Capital.


HDFC Institutional Equities foresees RBL Bank, IndusInd Bank, Karur Vysya Bank, City Union Bank and DCB Bank to face NIM compression, while and are seen reporting stable margins.


‘NPAs unreflective of asset quality’


Extension of moratorium, points out, till August would push recognition of pain points, thereby leading to benign slippages and stable headline non-performing asset (NPA) numbers.


“Given lenders shifting strategy to opt-in model, time to access borrowers profile and resumption of activities will lead to a decline in borrowers seeking moratorium. However, the probability of slippages into NPA still remains uncertain… For our coverage universe, we expect absolute GNPA at Rs 2,78,362 crore in Q1FY21E compared to Rs 2,78,966 crore in Q4FY20,” the brokerage said.


HDFC Institutional Equities, meanwhile, believes that most banks would see optically stable asset quality (QoQ). The standstill benefit of classification, it says, is likely to limit slippages unless banks voluntarily classify an account as a non-performing one.


Provisions and slippages


“Axis Bank, City Union Bank, and DCB Bank made relatively higher Covid-19 related provisions in 4QFY20. Therefore, we expect them to report lower provisions (QoQ). However, we expect IndusInd Bank, Federal Bank, and RBL Bank to report higher provisions,” HDFC Institutional Equities said in an earnings preview report.


For Elara Capital, slippages are likely to decline due to moratorium. “Slippages could be from corporate accounts not under moratorium. However, in the absence of any large account being downgraded to default by rating agencies in Q1FY21, that is unlikely to happen. With minimal slippages, provisions will be discretionary,” it said.


Key monitorables


Analysts would track loan disbursals under credit guarantee scheme, Covid-19 related provisions and changes in provision coverage ratio, details on the moratorium extended, and deposits accretion.





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