Q3 review: Credit growth, weak NII, fee income to impact banking sector

Analysts believe that the third quarter ended December 31, 2016 results for the banking sector will be tepid.

Here are some factors to play their role in affecting banks profitability.

Credit Growth to impact Net Interest Income:

M B Mahesh, Nischint Chawathe and Abhijeet Sakhare of Kotak Institutional Equities said, “We expect banks to report 9% yoy NII growth led by (1) lower impact of income derecognition compared to base quarter which witnesses interest reversals on account of AQR exercise, (2) excess liquidity following demonetization being deployed in fixed income securities.”

Analysts at Systematix Group expect NII growth for banking system to come at a modest 6.6% yoy (-1.4% qoq). While analysts from Motilal said, “We expect NII to decline 2% QoQ (but grow 4% YoY) for state-owned banks, and grow 10% YoY (stable QoQ) for private sector banks.”

Net Interest Margin (NIM):

As per Kotak, NIM may be difficult on the medium-term and the core pressure is expected to arise from (1) sharp cuts in MCLR announced in January, (2) greater competitive intensity which will bring down excess spread over benchmarks, (3) part convergence between base rates and MCLR and (4) comfortable liquidity position in the money markets.

Non-Performing Assets (NPAs) and Provisions:

The NPAs has been the major drawback for Indian banks especially for PSBs for quite a few years now.

Systematix said, “We believe asset quality issues for the sector to have continued, given the persistent weak macroeconomic environment, leading to further provisioning for NPAs arising from restructured loans and for fresh slippages. Hence, we expect credit costs to remain high for most banks, though lower yoy.”

Motilal Oswal said, "We do not see material change in reported asset quality as (a) large corporate slippages are already taken care of, (b) small value accounts have got forbearance from the RBI for a quarter, and (c) small value NPAs were recovered, with borrowers depositing old currency. Ageing of NPA will lead to higher provisioning charge during the quarter.”

Treasury gains: 

Treasury profits are likely for most banks, with the possibility of a reversal of any mark-to-market losses (MTM). Kotak said, "A 50 bps change with 3-4 year duration translates to ~150-200 bps profit in the books of the bank."

Retail, small business loan growth:

Kotak's said, "RBI has provided 90-day extension for repayment in small ticket (up to Rs 10 million) business loans, which may lead to slower repayment rate and hence support headline loan growth."

It expects banks with established retail loan machinery like Axis Bank, HDFC Bank, ICICI Bank and SBI to be better positioned to tide over the impact of demonetization.

Systematix said, "We expect banks’ pre-provisioning profits to rise a modest 7.7% yoy (-14.2% qoq). However, due to lower NPA provisioning yoy, we expect our banking universe to see the net profit rising 54.9% yoy in 3QFY17e."