NPA clean-up to reflect on banks’ earnings

Banks' March-quarter earnings may be their worst in years as Reserve Bank of India's (RBI) forced bad loans recognition eroded earnings despite a boost from treasury gains. Investors, however, will keenly watch for guidance on whether the industry is done with the clean-up.

State-run banks will bear the brunt of these provisions, barring Bank of Baroda which went for a sweeping provisioning in the December quarter. But the picture is not pretty at private lenders such as ICICI Bank and Axis Bankwhich went overboard with infrastructure lending. HDFC Bank may yet again stand above the rest, and probably show in contrast that its corporate loans book grew to record when others are reining in

While it may be a sometime before HDFC Bank gets back to its habitual 30% earnings growth, analysts are expecting it to accelerate its focus on corporate lending which is estimated to get to Rs 1 lakh crore.

The industry as a whole may see its profits collapse with state-run banks' net profit crashing 87% in the March quarter, while private banks report 5% growth, forecasts Kotak Institutional Equities. Revenue for private banks may advance 15%, and for state banks it may fall 3%, it said.

"I would still keep an eye on asset quality, provisions and the management's guidance on credit costs,'' says Manish Ostwal, analyst at Nirmal Bang Securities said. "But more important will be guidance for next fiscal, particularly growth. Some state-owned banks like SBI, Canara Bank and BoB have taken the pain and could be re-rated." RBI allowed banks to make half the provisions arising due to Asset Quality Review in Q3 while the remaining provisions are likely in Q4.

Many public sector banks reported record losses in the December quarter. Losses at Bank of India, Indian Overseas Bank, UCO Bank, Syndicate Bank, Central Bank of India, Dena Bank, Allahabad Bank, State Bank of Patiala, IDBI Bank and Bank of Baroda together added up to a huge Rs 12,756 crore in the quarter.

Bank credit growth has fallen below 10% in2015-16, thelowestin18years. But onesavinggracecouldbetheirtreasury income where a surge in bond prices could help them buffer the losses from infra loans. "The 26-bps fall in 10-year G-Sec yields during the quarter should result in healthy treasury income. Marginswillremainunderpressure for PSU banks with significant back ended growth in Q4,'' says Spark Capital.