Treasury gains to aid banking sector’s profitability in Q2

Stressed non-performing assets (NPA) may have continued to haunt banking sector's second quarter of current fiscal. 

Kotak Institutional Equities Research said, "Banks  are expected to report 15% yoy decline in earnings on the back of accelerating revenue growth of 18% yoy led by higher treasury income as they continue to provide for bad loans (82% yoy) for NPLs."

Religare Research added, "Banks will continue with NPA recognition but the pace of incremental slippages is likely to be lower, especially for public sector banks (PSB), as a large part of the pain has been dealt with.”

But this time many analysts believe that some soothing balm in the form of treasury incomes, especially public sector banks (PSBs) may be applied. 

Parag Jariwala and Vikesh Mehta analysts of Religare Research said, “We expect Q2FY17 to be a relatively better quarter for our banking universe with only a 3% YoY decline in PAT as strong treasury gains will likely support profitability.”

As interest rates have declined by almost 50 basis points during the quarter, it has resulted in strong treasury income for most banks. This would be somewhat 1.25% of the investment portfolio adjusting for the duration, Kotak Institutional Equities said.

However, a large part of treasury income is tied up in Held to Maturity (HTM) portfolio, it is believed that high OMO (Open Market Operations) of RBI should result in it being reported as actual gains, added Kotak.   

Kotak sees private banks to report a decline of 7% yoy and public banks 28% yoy. Going ahead with no base rate cuts for the quarter and average deposit rates declining, these banks are expected to report flat Net Interest Income (NII) (qoq/yoy).

Among private such as HDFC Bank, IndusInd Bank, City Union Bank and Kotak Mahindra bank asset quality is expected to remain healthy as these are retail-oriented banks. This would be followed by  no base rate cuts for the quarter and decline in average deposit rates. 
 
Performance of Axis Bank and ICICI Bank will be keenly watched as analyst expects slippage ratio to further decline from 1QFY16 levels as key portfolios have already taken a fair bit of pain, Kotak said. 

It is said that ICICI Bank has a strong quarter with insurance stake sale as  proceeds from the stake sale could curb in cleaning up the bank's balance sheet. 

For public sector bank loan growth is expected to stay difficult, said Religare Research. 

As per the latest data, industry-wide loan growth lingered at sub-10% in Q2 with only retail loans reporting strong growth of 18%. While corporate loans remained flat, displaying  no signs of improvement in corporate demand and/or fresh investments. 

Once again analysts expects private banks to outpace PSBs in terms of credit growth

On the positive side, given that treasury yields have declined by ~60bps in Q2FY17, most banks (especially PSBs) will report higher treasury gains, thus aiding profitability, explained Religare Research.