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Bottom lines of banks to face stress test this fiscal

Author: Debasis Mohapatra & A Saye Sekhar/Wednesday, April 25, 2018/Categories: Banking & Financial Services

Bottom lines of banks to face stress test this fiscal

Despite measures like relaxation on provisioning norms and more time for absorbing treasury losses given by the RBI, profitability of banks will continue to remain under pressure in the current financial year.

Factors like tepid credit growth, burgeoning provision requirement on the back of rising loan losses, delay in resolution of bad loan accounts referred to NCLT among others are seen as the key challenges before the banking industry in the current fiscal year.

“Provision requirement on NPA accounts will remain high. Swift resolution through NCLT seems to be challenging at this point of time,” group head- financial sector ratings at rating agency ICRA, Karthik Srinivasan told The Finapolis.

These factors will keep profitability of banks, especially of public sector banks, under pressure, he added.

The debt of large corporates may translate into an average write-off of almost 50 per cent of the loan amount, while there could be a much closer haircut for small companies.

Spread of losses in four quarters

In a recent decision, the Reserve Bank of India allowed banks to spread their losses arising from trading in government bonds over four quarters. With 10-year benchmark government yield surging 67 basis points in the December quarter, entire banking sector had reported a loss of Rs 15,500 crore of treasury losses.

With the RBI’s move to spread losses, banks’ provisioning burden is likely to be reduced by Rs 27,000 crore, according to a CRISIL report.

Similarly, the central bank has also reduced the provisioning requirement of banks on NCLT accounts. According to the new norm, banks now have to keep a provision of 40% on loan accounts referred to the National Company Law Tribunal (NCLT) against the earlier requirement of 50%. This relaxed norm will remain operational till the end of June quarter.

“In fiscal 2019, operating profitability of banks should stabilise on the back of incremental credit growth and lower interest reversals after reduction in fresh slippages to NPAs but overall, bottom lines will remain under pressure because of high provisioning burden stemming from the large stock of NPAs,” said Vydianathan Ramaswamy, associate director of CRISIL Ratings said.

Analysts are of the opinion that public sectors banks remain more vulnerable as compared to their private sector peers with respect to profitability.

“Though accretion of NPAs will be less as compared to last fiscal, still public sector banks will have to set aside huge provisions for complying with regulatory norms. This is likely to impact the credit growth in the system,” a banking source said.

While bad loans of public sector banks stood at around Rs 8 lakh crore by December 2017, it was around Rs 1.1 lakh crore for the private sector lenders. According to financial stability of report of the RBI, gross NPA of the banking system was at around 10.8% by the end of March 2018.

“Despite governance concerns, the financials of private sector banks remain in a better position than their public sector peers,” Srinivasan of ICRA said.

Notably, while private sector lender ICICI Bank is roiled in a controversy on the alleged role of its chief executive officer, Chanda Kochhar in sanctioning credit to Videocon Group, the decision of Axis Bank board to extend the term of Shikha Sharma has come under the RBI scanner.

Yet, they would do well

Against all odds, banking sector scrips are expected to perform well this fiscal, according to experts.

Karvy Stock Broking Ltd is positive on the performance of corporate banks, including the embattled ICICI and Axis. The guidance for the scrips is ‘buy’. They show improvement in their core (loan growth/fee income/stable net interest margins).

The S&P BSE BANKEX Index was at 27,855 at the end of March. The index is down by 1.6% in the last 30 days, while it gained 14.4 per cent in one year with 8 advances and three declines. The advances together registered a robust growth of 72.73 per cent, while the declines bought the bankex down by 27.27 per cent in the last one year.

The index peaked at 31,375.68 on January 29, 2018, while the 52-week low was 24,495.24 on April 24, 2017.

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Debasis Mohapatra & A Saye Sekhar

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