From ICICI Bank, HDFC Bank to SBI, top 8 banks’ Q1 profit may fall 23%

The combined profit of the top five public sector banks (PSBs) and top three private sector banks is expected to have fallen by 22.9% (Y-o-Y) to Rs 10,882 crore in the first quarter of the current fiscal, aggregate estimates by three leading brokerages indicate.

Estimates by HSBC Global Research, Kotak Institutional Equities and Motilal Oswal suggest that the primary reason behind this decline would be the combined profits of the five PSBs – State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB), Union Bank of India (UBI) and Canara Bank – dropping by almost 50% from their corresponding figures in the same quarter last year.

The estimates, however, expect the net interest income (NII) – the difference between interest earned and interest expended – of these eight banks to have risen by 7.2% (Y-o-Y) during the quarter.

The main reason, according to the brokerages, for such a decline in the bottom line of the PSBs is a rise in provisions set aside for non-performing loans (NPLs). Kotak Institutional Equities, for instance, expects such provisions of the country’s largest bank, SBI, to have risen by 87.9% (y-o-y) to Rs 6,312.4 crore and that of PNB, BoB and UBI to have more than doubled compared with the same quarter last year.

The brokerage attributes such a rise in provisions to aging NPLs. As per Reserve Bank of India (RBI) guidelines, while the provisioning requirement of an asset that has remained ‘doubtful’ for less than a year is 25%, the same for an asset that has remained ‘doubtful’ for more than three years is 100%.

When it comes to net interest margins (NIMs), all the three brokerages expect them to remain largely stable as compared to the Q4FY16 levels. “NIMs should remain stable Q-o-Q as banks have largely refrained from cutting the base rate/MCLR, which would support loan yields; cost of deposits has continued to fall; and the base has been reset in 2H, led by high slippages from the RBI’s AQR,” analysts at Motilal Oswal said.

Given that system-wide loan growth was in single digits during most of the last quarter, analysts don’t expect any positive surprise from large PSBs, while they continue to expect out-performance from private sector banks.

Analysts at HSBC Global Research, for instance, expect advances of private sector banks to have grown at more than four times that of PSBs. “As of Q1FY17-end, system loan growth remains subdued at 8.7% (Y-o-Y), indicating that most of the PSU banks continue to consolidate their loan books. Private banks, on the other hand, are likely to continue expanding their loan books, in line with recent quarters. We expect 5% (Y-o-Y) loan growth for PSBs vs 21% growth for private banks, implying that incrementally, private banks will continue to gain significant loan market share,” they observe.