Reported slippages would be elevated, KIE said, but banks were not expected to report a worrying ratio, given the improvement seen in economic recovery in recent quarters.
As banks report their first set of quarterly earnings after the Supreme Court vacated an interim stay on the recognition of fresh bad loans, slippages could be elevated in Q4FY21, analysts said. Lenders could also reverse some amount of interest income, which could get reflected in their net interest income (NII) numbers. Kotak Institutional Equities (KIE) expects NII growth to be 18% year on year (YoY) for banks. “On the net interest income line, we see a higher level of one-off income recognition (due to NPL recovery) and income de-recognition (slippages recognised in this quarter on a cumulative basis for lenders who have not done it previously),” the brokerage said, adding that treasury income would be lower, too.
Reported slippages would be elevated, KIE said, but banks were not expected to report a worrying ratio, given the improvement seen in economic recovery in recent quarters. “We expect overall NPL (non-performing loan) ratios to remain significantly lower than RBI projections, considering that we have seen significant recovery of bad loans from a few companies (steel and infrastructure),” KIE said. Reported write-offs could be high as well.
Loan losses in the banking sector, as measured by the gross non-performing asset (GNPA) ratio could nearly double to 13.5% by September in a baseline scenario, and to as high as 14.8% in a severe-stress scenario resulting from the pandemic, the RBI had said in its last financial stability report (FSR). Volatile trends could emerge on provisions as lenders are likely to dip into Covid provisions made earlier or make higher provisions this quarter as well.
Analysts at Motilal Oswal Financial Services said while overall trends in asset quality had fared better than expectations, the recent surge in Covid-19 cases and the fear of a lockdown in key districts necessitate being watchful on asset quality. “While many banks have already provided for this likely increase and carry additional provision buffers, which should limit the impact on profitability, we expect them to continue to strengthen their balance sheets and credit cost to remain elevated,” they said in a report.
While analysts have mixed views on the pace of loan growth, most of them expect it to be driven by retail credit. Corporate credit growth remains muted in a scenario of overall deleveraging and lower risk appetite on the part of lenders.