As banks report their 1st set of quarterly earnings immediately after the Supreme Court vacated an interim remain on the recognition of fresh undesirable loans, slippages could be elevated in Q4FY21, analysts mentioned. Lenders could also reverse some quantity of interest earnings, which could get reflected in their net interest earnings (NII) numbers. Kotak Institutional Equities (KIE) expects NII development 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 mentioned, adding that treasury earnings would be reduce, as well.
Reported slippages would be elevated, KIE mentioned, but banks had been not anticipated to report a worrying ratio, offered the improvement observed in financial recovery in current 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 mentioned. Reported create-offs could be higher as nicely.
Loan losses in the banking sector, as measured by the gross non-performing asset (GNPA) ratio could almost double to 13.5% by September in a baseline situation, and to as higher as 14.8% in a extreme-strain situation resulting from the pandemic, the RBI had mentioned in its final monetary stability report (FSR). Volatile trends could emerge on provisions as lenders are probably to dip into Covid provisions produced earlier or make larger provisions this quarter as nicely.
Analysts at Motilal Oswal Financial Services mentioned though all round trends in asset good quality had fared far better than expectations, the current surge in Covid-19 circumstances and the worry of a lockdown in important districts necessitate becoming watchful on asset good 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 mentioned in a report.
While analysts have mixed views on the pace of loan development, most of them count on it to be driven by retail credit. Corporate credit development remains muted in a situation of all round deleveraging and reduce threat appetite on the portion of lenders.