For Indian banks, the September quarter is likely to bring good news on both growth and asset quality. Early updates by select lenders indicate that loan disbursements and collections have recovered from the impact of the second wave of covid.
At the aggregate level, both public sector banks and their private sector peers may report an increase in net profits as the need to make high provisions would have decreased. Coupled with the recovery of the Dewan Housing Finance Corp. Ltd (DHFL) account, lenders would find that earnings would get a big boost. Analysts expect a decent sequential improvement in almost every metric, from loan growth to gross loan loss rates. Comparison with the prior year period would show a better metric given the base effect. “For the banks we cover, we see an uptick in earnings (up 20% YoY and 9% QoQ) with a combination of rebound in core revenue and moderation in borrowing costs. We see Net Interest Income (NII) grow 7% YoY and 3% QoQ and, more importantly, rates increase 17% YoY and 9% QoQ, reflecting the normalization in the businesses of lending and cross-selling, “wrote analysts at Jefferies India Pvt.. Ltd.
NII growth has been hit hard by the pandemic due to increased stress and a drop in loan disbursements. Despite a recovery in the second half, most banks reported low NII growth for fiscal year 21. That trend continued through the June 2021 quarter due to restrictions imposed during the second wave of the pandemic. . However, loan disbursements, especially retail, have recovered during the September quarter. In August, retail loan growth for the banking system was 12.5%, higher than overall loan growth of 6.7%, according to data from the Reserve Bank of India (RBI).
Buoyed by holiday 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 an improvement in loan growth. This would translate into a strong recovery in basic interest income growth.
Another factor that helps basic income growth would be stable margins. Bank deposit rates have tended to decline and most lenders have witnessed a sharp drop in the cost of funds. Analysts expect private sector banks to show more improvements in net interest margins than public sector banks. This is because private sector lenders have maintained a higher level of interest rates on a weighted average basis compared to their public sector peers.
The result is that the NII growth of private sector banks would be higher than that of public sector banks. Given the increase in other fee-related businesses, banks can also expect a decent increase in non-interest income. That brings us to asset quality, another important factor that determines the profitability of banks. Analysts expect some relief here for lenders, although it is likely to be limited. Collections have improved considerably for most lenders, which bodes well for bad loan rates. The restructured loan pile can also remain stable.
That said, lenders who are exposed to SREI group companies may find it difficult to keep their provisions in check. As such, most banks have rated group loans bad for the quarter. Furthermore, stress among small businesses has barely been reduced. Therefore, banks with high exposure to small businesses may struggle.
However, another brake could be vehicle loans. New stresses will remain elevated for auto loans, property loans and microfinance, analysts at Emkay Global Financial Services Ltd. said. The stress on small business lending will be seen through restructuring, they said.
Asset quality trends could be mixed for the September quarter depending on the degree of exposure of lenders to vulnerable loan portfolios. Therefore, provisioning would vary between lenders. As such, some banks may choose to create provisions in anticipation of stress in the coming quarters.
The optimism surrounding loan growth and consistent asset quality is visible in the movement of bank stocks. The Nifty Bank Index has gained 10% since July. Shares of large lenders such as HDFC Bank, ICICI Bank and Axis Bank have moved faster. That said, the industry index has underperformed the overall Nifty, which has gained around 14%.
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