NIE: Surgery on bad loans seems to be working out

10 April 2019: The worst seems to be over for India’s banking sector, which undertook a ‘deep surgery’ on bad loans stretching about 36 months. Corporate stress appears to have bottomed out improving the overall asset quality, particularly for public sector banks, which account for over 70 per cent of the sector. Though in terms of profitability, state-run banks are yet to make a 360-degree turn, private banks are likely to report an earnings tailwinds in the just concluded quarter ending March, 2019. Overall, incremental stress will ebb during the current fiscal, though RBI’s divergence report on some banks could once again rattle investors and upset the market. 

Though corporate stress eased broadly, some amount of trouble too cannot be ruled out from real estate, which is facing liquidity pressure and weak sentiment. Besides, trouble is easy to spark from IL&FS, which is undergoing a resolution plan under the government-appointed board. “IL&FS still continues to be an overhang even with regard to its operational subsidiaries, and provisioning for the same will eat into this quarter’s earnings,” noted brokerage Edelweiss Research. 

Banks may have made a stunning `3 lakh crore worth loan recoveries, but the general sense is that the debt resolution process has been slower than desired and so is the recovery rate. According to Edelweiss, the next trigger for comfort will be driven by resolutions across NCLT cases as it will lead to upgrade of over 25 per cent system-wide gross NPAs with minimal incremental provisioning. Recoveries from big accounts like Essar Steel (for which an order has already been passed) are expected during the current quarter, which will provide earnings cushion with interest income reversals. 

As for overall performance, banks’ core operating performance is expected to increase by about 23 per cent in FY19 over the previous year, with growth and asset quality tailwinds on the horizon. Weakening competition and portfolio buy outs will bolster banks to sustain growth.

The moderating deposit growth could, however, throw a spanner in the works. While banks’ race for deposits will keep deposit rates elevated, intense competition for better-rated assets will keep credit pricing power in check, Edelweiss said. Such a move will create downward pressure on net interest margins, the key metric indicating banks’ financial performance. However, interest accruals in ensuing quarters due to resolutions expected under NCLT cases should provide one-time support to NIMs going forward. 

Typically, the last quarter is considered a seasonally strong period thanks to higher income, marked by higher processing fees, third-party distribution income and others. Besides, dividend and interest on income tax refund, especially for PSU banks tend to flow in Q4, adding to fee income. This growth may not reflect on an annual basis, but will be robust sequentially, said Edelweiss.

The New Indian Express reported

Categories: General News, India Bankruptcy

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