Banks likely to report muted profits in Q2, but bad loans to come down

With bad loans having been largely recognised, the worst may be over for banks but second quarter earnings could still be muted. Analysts caution that some lenders could see volatility in earnings and muted profits on the back of recent tax changes, poor loan growth, and credit costs.

“The industry has been doing fine this quarter. The implications of DTA write-off has to be seen on the basis of the view taken by each bank,” said Sanjay Agarwal, Senior Director, CARE Ratings

Private sector lenders are set to announce their results for the July to September 2019 quarter, starting with IndusInd Bank on Thursday.

“Decelerating system credit growth, muted margins, and fee income is likely to lead to a moderated operating profit growth of 15 per cent for our coverage universe of large banks. With the overhang of stressed assets continuing, we are unlikely to see any meaningful turnaround in credit costs for most banks,” said ICICI Securities in a research report, adding that it expects 27 per cent increase in pre-tax profits on an annual basis and two per cent drop in net profit.

Corporate tax cut

The recent cuts in corporate tax rate could also mean that banks with high corporate loans could increase provisions for bad loans or take the benefit to earnings or increase the write-down for deferred tax asset (DTA).

“Post the recent cut in corporate tax rates, we expect banks to write down the deferred tax assets on their balance sheet. This will have a one-time impact on post-tax earnings,” said Kotak Institutional Equities, adding that it expects banks under coverage to show volatile earnings although operating profit growth should display stable trends.

Motilal Oswal Institutional Equities said it expects banks to mark down DTAs in the second quarter itself. “Adjusting for DTA, we estimate private banks to report 64 per cent year-on-year growth in net earnings. We estimate PSBs’ earnings to remain suppressed, led by sluggish loan growth, elevated credit costs, and DTA reversals,” it said.

Bad loans

Non-performing assets (NPAs) are likely to see further improvement this fiscal. “We expect gross and net NPLs to show an improvement on the back of lower slippages and a few resolutions in the power sector, mostly outside the IBC process. Progress on major resolutions through the IBC process has been slow. The real estate exposure for banks is not too worrisome,” said Kotak Institutional Equities.

Crisil had recently said that gross NPAs for the banking system will come down to 8 per cent to 8.5 per cent by March from the peak of 11.5 per cent in March 2018. However, Reliance Securities remained cautious. “While there was significant improvement in slippages during the last five quarters, the risk of another wave of slippages from the leveraged corporates/NBFCs has increased during the first half of the fiscal,” it noted.

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