There will be a sharp drop in bad loans from the same time last year when gross NPAs had peaked
January-March quarter will be challenging for banks, especially those whose balance-sheets are skewed towards large corporate loans.
According to rating agency Icra's estimates, 61 large borrowers with a total debt of Rs 2.45 lakh crore are currently being resolved under strategic debt restructuring schemes. Until the end of the third quarter, about 72% of the debt continued to be classified as standard advance.
However, there will be a sharp drop in bad loans from the same time last year when gross non-performing assets (NPAs) had peaked, following asset quality review by Reserve Bank of India (RBI). This may lead to a rise in net earnings, but the loan growth will result in decline in net interest margins while credit costs will be elevated.
Darpin Shah, analyst with HDFC Securities, said, "Due to lower NPAs, banks are expected to announce a sharp rise in net earnings. For the public sector banks, the loan growth is expected to improve sequentially. Due to the demonetization effect, growth in deposits is expected to remain strong (led by Casa, or current account saving account, deposits). Improvement in the credit-deposit ratio, declining trends in slippages and no one-offs (interest reversals on SDR/S4A exposures) will drive net interest margins sequentially"
Fresh additions to gross NPAs (GNPAs) during the third quarter of fiscal 2017 stood lower at Rs 26,400 crore as compared to Rs 1.36 lakh crore during nine months of the last fiscal, partly aided by higher write-offs during the last quarter.
Karthik Srinivasan, senior vice-president and group head – financial sector ratings, Icra, said, "While the declining fresh NPA generation may reflect the easing asset quality pressures, the large quantum of fresh slippages outside the standard restructured advances also reflects the asset quality pressure outside the restructured book. As per Icra's estimates, about 55% and 77% of fresh NPAs generated during the third quarter and first nine months of the last fiscal, respectively, were outside the restructured book.
The rise in yields in the fourth quarter will see treasury gains moderating.
A senior banker said, "We hoped to have some treasury gains during the quarter but since the yields went up sharply we will see only limited gains from the segment."
However, the retail-focused banks like IndusInd Bank, Kotak Mahindra bank are all expected to do well as the retail loans continue to grow though at a slower pace. HDFC Securities said in a report one needs to see the asset quality movement with sequential moderation in the slippages and implementation of various RBI dispensations, bank's resolutions in large exposures.
Private banks will continue to perform better than their public sector counterparts but some private banks with large corporate exposures could see some pressure on their margins on account of the large corporate loans.
Rakesh Sharma from Elara Capital said, "Our preferred picks remain HDFC Bank, ICICI Bank and IndusInd Bank among private banks. Among PSBs, Bank of Baroda is expected to overshadow peers. We believe the improvement in core financial performance is more tangible, and banks with a better performance on this front would outperform peers on a sustained basis."
TOUGH TIMES
- There will be a sharp drop in bad loans from the same time last year when gross NPAs had peaked
- For the public sector banks, the loan growth is expected to improve sequentially, the trajectory is trending downward
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Fresh additions to gross NPAs (GNPAs) during the third quarter of fiscal 2017 stood lower at Rs 26,400 crore as compared to Rs 1.36 lakh crore during nine months of the last fiscal, partly aided by higher write-offs during the last quarter.
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