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Banking sector Q1FY21 earnings preview: Stable asset quality, NIM contraction for most banks likely, says report

Banking sector Q1FY21 earnings preview: Stable asset quality, NIM contraction for most banks likely, says report

Banking sector Q1FY21 earnings preview: Stable asset quality, NIM contraction for most banks likely, says report
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By Ankit Gohel  Jul 13, 2020 8:13:03 PM IST (Published)

The COVID-19 led disruptions coupled with an already weak credit demand is likely to impact the asset growth of most of the banks and non-banking financial companies along with lower collections in the first quarter of fiscal 2021.

The COVID-19 led disruptions coupled with an already weak credit demand is likely to impact the asset growth of most of the banks and non-banking financial companies along with lower collections in the first quarter of fiscal 2021.

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According to HDFC Securities Institutional Research, the standstill classification benefit or moratorium would have optically limited slippages and gross non-performing assets (GNPA). However, earnings are expected to dent due to persisting elevated provisions for some lenders as they may have chosen to fortify their balance sheets.
It expects the banking space to witness increased polarisation. Larger banks with sufficient capital, strong granular liability franchises and a reasonable asset quality track record are expected to emerge stronger, the brokerage said in a report.
The halt in economic activities due to the nationwide lockdown has resulted in slower credit growth and limited fresh disbursals in most loan segments, it says.
The brokerage believes that a significant proportion of fresh lending in the quarter has occurred in the segments such as agri loans, gold loans, and MSME loans under the National Credit Guarantee Trustee Company (NCGTC) scheme.
On the deposits front, HDFC Securities Institutional Research expects that large banks such as ICICI Bank, Axis Bank and Kotak Mahindra Bank and State Bank of India (SBI) would have seen good deposit traction (faster growth versus the sector).
ICICI Bank and Axis Bank are expected to report stable net interest margins, QoQ. Although interest rates have trended downwards, the fall in yields will be cushioned by lower slippages, according to the brokerage. Further, these banks are likely to see a fall in their cost of funds.
Kotak Mahindra Bank is expected to see higher NIMs given that it cut its savings account rates sharply in April. Banks such as RBL Bank, IndusInd Bank, Karur Vysya Bank, City Union Bank and DCB Bank may see NIMs compress due to cost of funds stickiness.
Over FY21E, HDFC Securities Institutional Research expects most banks to see NIM compression.
Further, Axis Bank, City Union Bank and DCB Bank, which made relatively higher COVID-19 related provisions in Q4FY20, are expected to report lower provisions (QoQ). IndusInd Bank, Federal Bank and SBI are expected to report higher provisions, according to the brokerage.
On the asset quality front, most banks are likely to see optically stable asset quality QoQ. “The standstill benefit classification is likely to limit slippages unless banks voluntarily classify an account as a non-performing one. Recoveries and upgrades will also be impacted,” the brokerage noted.
The brokerage also expects the proportion of banks’ loans under moratorium to have reduced by June-20. Repayments are likely to have improved after lockdown restrictions were eased.
Going ahead, disbursals under NCGTC scheme, COVID-19 related provisions and changes in PCR, details on the moratorium extended, and deposits accretion for banks and availability of funds for NBFCs and HFCs will be watched out for.
For NBFCs, the brokerage expects NIMs to remain stable as the liquidity drag would compensate for the effect of a fall in the cost of funds. Provisions are expected to remain elevated in Q1. Like banks, NBFCs and HFCs are expected to see optically stable asset quality.
“They would have also seen a decrease in the proportion of loans under moratorium in June 2020. Collection efficiency is likely to have improved after lockdown restrictions were eased,” the brokerage said.
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