Public sector banks are likely to report huge treasury gains when they report quarterly financial results for the April-June quarter this month,analysts said. But elevated levels of slippages,low margins and higher wage revisions will mean disappointing net profit growth.
As per analysts,the 10-year benchmark bond yields are down 50 basis points (bps) in the first quarter as compared with a 36 bps decline in the same period last year,this will give public sector banks a significant boost to their non-interest income.
Government banks may see huge gains or write backs on the bond book due to longer available for sale (AFS) duration and relatively higher share of AFS book, analysts Rajeev Varma and Veekesh Gandhi from Bank of America Merrill Lynch said in their report this week.
The stressed asset portfolio of state-owned banks is expected to remain at elevated levels as a corporate debt restructuring pipeline of close to R20,000 crore is expected during the year. However,a new reporting format which allows banks to remove loans that have reported two years of satisfactory performance from the pool and completion of select state electricity board (SEB) restructuring should cushion the impact of fresh restructuring of loans,analysts said. We expect SBIs slippages to remain in R5,500-6,000 crore range. However,key to watch for in SBI will recoveries trend, Varma and Gandhi noted.
Retail deposits rates are not softening at the same pace at which banks are reducing their lending rates or reducing the spread across loans,which is likely to hit margins adversely for state-owned banks. Though an attempt to shed high cost deposits during the last year,will help in cushioning pressure on margins.
Analsysts from Kotak Institutional Equities expect that HDFC Bank’s net interest margin will fall by 10 basis points quarter-on-quarter.
Axis Bank and IndusInd Bank are expected to show a year-on-year jump of 25-40 bps in margins on recent capital raise. ICICI Bank and Yes Bank are expected to show a natural margin expansion by 8-10 bps driven due to a change in loan mix.
Analysts also noted that many government banks had started making wage revision provisions and linked to that revision in pensions or gratuity. While few like State Bank of India (SBI),Punjab National Bank (PNB),Oriental Bank of Commerce (OBC) are provisioning for a wage hike of13-15%,many like Bank of Baroda (BoB),Bank of India (BoI) accounted for a 5-7% hike in the March quarter.
With banks being conservative in estimating wage revision needs so far,analysts caution that a jump in such provisions in future quarters could add to pressure on operations costs and profitability.fe