July 3, 2015 3:19:49 am
Domestic stock markets may have weathered the Greek crisis for now and still holding fort. But, if the weak earnings growth of the March quarter is anything to go by, the markets are likely to come under pressure if there is no improvement in the corporate earnings for the June 2015 quarter.
So while global concerns were expected to weigh on the domestic market, it is the local factors that may put the markets under pressure. According to a report by Kotak Institutional Equities, the banking sector will continue to reel under pressure. “We expect earnings to decline 2 per cent pear-on-year (YoY) due to lower treasury income, weak NII (net interest income) growth because of tepid loan growth and elevated provisions,” said the Kotak report. Public sector banks (PSBs) are expected to be more under stress than their private sector counterparts. The report projects a 16 per cent YoY decline in earnings for PSBs, whereas private banks are expected to clock a 14 per cent growth.
Non-performing assets that have remained a major cause of worry for the banks are expected to remain high. “We expect fresh impairments to show improvement over the previous quarter but would still remain high. We believe that the slippage levels would still remain elevated although a large share of the slippages is now coming from the restructured loan portfolio as banks are reporting a rising share of failed cases of restructuring,” said the report.
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While the financial sector comes at the core of economic growth, the report does not project things to be improving for now.
Some of the important aspects highlighted in the report are:
Banks: another muted performance ahead
As per the last available data, loan growth for the sector was at 9.8 per cent YoY – marginally lower than that of the previous quarter. As expected, we have not seen the improvement that has been much anticipated in the previous few quarters. The slowdown is visible primarily in the large corporate portfolios where growth has slowed to 5 per cent levels while the retail loan growth is still going better at above 15 per cent levels.
With a sharp slowdown in fresh investments, loan disbursements to the corporate segment have fallen sharply and it is hurting PSBs given that their exposure in the corporate book is more than 50 per cent of loans. Also, many of the restructured loans are now completing their moratorium period which implies that the pace of repayment of existing loans could have also accelerated.
Deposit growth ahead of loan growth
According to the report, overall funding mix is likely to change as deposit mobilisation has picked up at the sectoral level. Deposit growth at 11 per cent is well ahead of loan growth. Most banks had aggressively looked to refinance their existing loans and shifted the nature of their funding requirements with higher reliance on borrowing as compared to deposits over the past one and a half years. This is likely to continue to reverse in the current quarter which implies that the balance sheet growth is likely to be lower than deposit growth.
Stable trends on net interest margin to continue
The report expects net interest margin (NIM) to remain stable quarter-on-quarter (QoQ) or witness a marginal compression in first quarter of FY16. While most banks took cuts in base rates in May and June by 25-30 basis points, the decline in cost of deposits that most banks had undertaken a few quarters back should be able to offset the recent cuts. There is pressure in maintaining yields in the corporate loan book as capex cycle is not picking up and banks are looking to reduce yields to reflect the lower risk and shift towards retail loan which is a yield dilutive process.
NII is expected to grow 10 per cent YoY for banks with PSBs growing at 5 per cent YoY and 18 per cent for private banks. Banks which have a higher reliance on wholesale deposits should benefit as the short-term yields have softened.
Treasury income to decline
Contribution from non-interest income is likely to turn weak after going strong over the past three quarters primarily on account of weak performance from treasury business, the report says.
The other issues on non-interest income line would continue as an immediate recovery in fee income, exchange income or recovery from written-off loans is unlikely. Yields have increased by 15-30 basis points in the current quarter.
The report states that broad discussions with a few banks indicate that the core fee income growth would be subdued as the capital expenditure cycle is yet to revive.
Private banks might report a broadly stable performance at 10-15 per cent levels as they are likely to see better traction from distribution of wealth management products.
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