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    Lower provisions, healthy treasury income may drive banking sector earnings growth in Q4FY20: Sharekhan

    Lower provisions, healthy treasury income may drive banking sector earnings growth in Q4FY20: Sharekhan

    Lower provisions, healthy treasury income may drive banking sector earnings growth in Q4FY20: Sharekhan
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    By Ankit Gohel   IST (Published)

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    The banking sector is expected to report reasonably strong earnings growth in the Q4FY20, driven by lower provisions and healthy treasury income. However, owing to the moratorium on loan repayment, reported earnings for Q4FY20 are likely to be of lesser significance, analysts said.

    The banking sector is expected to report reasonably strong earnings growth in the fourth quarter of FY20, driven by lower provisions and healthy treasury income. However, owing to the moratorium on loan repayment, reported earnings for Q4FY20 are likely to be of lesser significance, analysts have said.
    The coronavirus pandemic and the nationwide lockdown had led to a slump in economic activity, which will hurt the banking and financial services (BFSI) sector. The Bank Nifty index has fallen over 40 percent in the current quarter.
    Loan growth has slowed to around 6 percent YoY and even retail loan growth is expected to decline.
    The quarter ending March 2020 could see market share consolidation continue in favour of private banks that are well-capitalised. Such banks are expected to see market share gains despite weak credit growth, broking firm Sharekhan said in a report.
    The brokerage house expects lower accretion to non-performing assets (NPAs) due to a few corporate resolutions through the IBC framework and one-time settlements that could accelerate in 4QFY20. On a sequential basis, the banks may not see major corporate accounts slipping due to the benefit of moratorium.
    “Business momentum in most segments steadily improved in January and February but abruptly stopped due to the COVID-19 lockdown in March. The lockdown impact is likely to have subdued credit growth for NBFCs for Q4FY20 and their medium term outlook, as their disbursals and collections are more dependent on physical contact,” said Lalitabh Shrivastawa, AVP – Research, Sharekhan.
    Insurance companies may not see earnings being significantly impacted in Q4, as the 30-day grace period by the regulator will help them curb persistency ratios. However, new business growth and premium collections could be impacted, he added.
    In Q4FY20, HDFC is likely to deliver a steady 13 percent YoY AUM growth, mainly due to lower disbursements in the last 15 days of Q4. Core net interest margin (NIM) may moderate marginally reflecting recent decline in home loan rates. Also, Q4 will not see dividend income or gain from stake sale benefit which were seen in Q4FY19, according to Sharekhan.
    For ICICI Bank, the brokerage expects strong Pre Provision Operating Profit (PPOP) growth, led by loan growth of around 12 percent YoY and stable NIM. The pace of reduction in gross non-performing assets (GNPA) are expected to continue, with write-offs and contained slippages. Credit costs likely to remain stable QoQ basis.
    The loan growth of HDFC Bank is expected to be at around 20 percent YoY, but a cautious outlook on growth may continue. Retail loan growth may be optically slower, due to weak volume growth in auto, while growth in the unsecured portfolio may remain strong.
    Sharekhan expects a marginally increase in HDFC Bank’s GNPA and also expects that the bank may choose to build a contingent provisions buffer for FY21.
    Axis Bank’s loan growth in Q4FY20 is expected at around 15 percent YoY with a greater focus on the retail segment. NIM will be sequentially flat helped by improving funding cost benefits. “We expect slippages to be elevated and mostly coming from the 'below investment grade book' and marginally higher retail & MSME slippages,” the broking firm said.
    Among the public sector banks, the largest state-run lender State Bank of India (SBI) may benefit due to recovery in NPLs (one large account and few smaller ones). Loan growth is likely to be near industry levels of 7 percent YoY with stable NIM (core) due to easing cost of funds.
    “Treasury income would include gains on account of stake sale in SBI Cards which will be a positive. We expect slippages mostly from SME loans, but the pace of accretion to be largely better than Q3. Provisions will be lower YoY due to higher recovery from bad loans, likely to be partly offset by COVID provisions,” the brokerage added.
    Going forward, due to the uncertainty on events, it is difficult to quantify the extent of impact on the economy as a whole and the financial system in particular. Banks and NBFCs have indicated that SMEs and unsecured loans could be more vulnerable at present, but analysts believe the impact of the pandemic is expected to be across sectors.
    “The quarter will be notable for the commentary on managements’ assessment and its plans to minimise business impact due to the lockdown. Moreover, strategies and steps taken by banks/NBFCs/ financials to de-risk their portfolios from the potential defaults once the moratorium ends will be keenly watched,” Shrivastava added.
    The brokerage believes that well-capitalised, retail-focused private banks and large corporate banks are better placed to recover their growth trajectory once the business scenario normalises.
    However, prolonged liquidity issues for NBFCs and an extended lockdown may pose significant challenges to the other borrower segments and the economy.
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