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Banking Sector: Q3FY18 results preview -
Banking Sector: Q3FY18 results preview
Reliance Securities | Published: 10 Jan, 2018  | Source :

Performance of Banking & Financial Service (BFS) sector is likely to remain under stress in 3QFY18 led by: (a) sharp decline in profitability from treasury operations; (b) higher MTM provisioning on non-HTM portfolio of the bank (benchmark 10 year Gsec yield increased by 65bps QoQ in 3QFY18); (c) higher provisioning on existing NPAs as well as additional provisioning on loans referred to NCLT/IBC; and (d) weaker business growth. However, the banks/NBFCs with relatively higher exposure to Retail and MSME segments will continue to deliver strong numbers.

Earnings profile of the corporate focused banks to remain subdued: We expect the banks with significant exposure to corporate term loans to report elevated level of provisioning. Further, ageing of existing NPAs and write-down of security receipts from sale to the ARC will keep their credit cost elevated in 3QFY18. However, fresh slippages are expected to decline, as recognition of stressed assets is peaking out across the banks. Continuing to remain firm on NPA recognition, the Reserve Bank of India (RBI) has asked the banks to refer 25 out of total 28 cases from the second set of larger stressed corporate accounts to NCLT/ IBC proceedings post the expiry of Dec’17 deadline. Further, the RBI has also asked the banks to provide more than 50% on all these accounts, which will negatively impact their profitability. Several cases referred to NCLT/IBC in first list indicated relatively higher haircut (in range of 60-80%) by the banks and hence, we expect provision expenses to remain elevated.


Further, few banks to report higher asset quality divergence in Annual Supervision Audit conducted by the RBI for FY17, which will be keenly watched by the market participants. Within that, we expect accelerated haircut/write-off by the Public Sector Banks as the Government of India has given final nod for much-needed capital infusion to the tune of Rs880bn in 4QFY18. However, the banks with higher retail/consumer portfolio will continue to show stable trend in their asset quality.

Outlook & Valuation

Lower operating profit, subdued treasury income and higher credit cost on ageing of stressed assets will negatively impact the sequential performance of the banks in 3QFY18. As the recent steps by the RBI and the GoI clearly indicate that the banks will have to accelerate their efforts to resolve issues on asset quality front, we expect further surge in provisioning expenses in FY18E. We expect overall return to remain depressed over FY18E for the banking sector in general and corporate term loan focused banks in particular. Further, we believe that incremental deterioration in asset quality has been aptly addressed in last few quarters, however speedy resolution will continue to impact banks’ profitability.

We expect improvement in banks’ core operating performance in coming quarters due to peaking out of NPA recognition cycle and improvement in non-corporate credit demand. As we expect the demand for retail loan to pick-up before any rise in demand for infrastructure/corporate loans, we prefer the banks having higher exposure to consumer and business banking portfolio. We expect asset quality stress to decline along with relatively moderation credit cost from FY19E onwards.

Our Top Picks:IndusInd Bank, DCB Bank, HDFC Bank and Federal Bank among private sector banks and SBI and Indian Bank among the PSBs.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.