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Banks likely to show stable operating performance, earnings recovery in Q1

Kotak Institutional Equities

As seen in the past few quarters, banks are likely to report further improvement in key metrics. Impairment ratios to decline led by lower slippages as well as high provisions for bad loans. Q1FY20 has a few one-offs, with merged financials for two banks, while the base has one-off recovery income. It was a muted quarter for most non-banks with weak loan growth, stable to compressed net interest margin (NIM) even as asset quality held on well in most segments.

Banks: no big headwinds to worry about for the quarter
We expect banks under coverage to show stable operating performance and recovery in earnings trajectory though there are a few one-offs for the quarter. We would see the merged financials reported for Bank of Baroda (with Dena and Vijaya) and IndusInd Bank

(with Bharat Financial). Secondly, the base quarter had one-off net interest income (Bhushan Steel), and thirdly, treasury income support would be higher
given the interest rate movement. Loan growth has slowed to 12% year-on-year (y-o-y) which would put pressure on revenue growth and we expect the decelerating trends to be more visible in retail oriented loan books like HDFC Bank and IndusInd Bank.

Asset quality to show further improvement
The early warning indicators as reported by RBI in the financial stability report in the previous fortnight reaffirms our hypothesis that the pending stress to be recognised by the banks is not too high. We expect gross and net NPLs to show further improvement as we see slippages declining further. Resolution through the IBC framework has slowed as several high profile cases could not reach a conclusion as anticipated earlier.

However, progress continues outside through settlements/upgradation/write-offs, etc. Real estate exposure for banks is not too worrisome while exposure to a few NBFCs is likely to be an area of concern though it is unlikely to translate into NPLs this quarter for any of the banks.

Among banks, we maintain our positive outlook on corporate banks (ICICI Bank and SBI) given their inexpensive valuations and visibility of steady progress towards RoE normalisation in FY2020/21. Yes Bank would have the most challenging quarter while there is likely to be a lot of focus on asset quality even for IndusInd Bank and RBL Bank.

Slowdown in revenue growth (loan and non-interest income) for banks like HDFC Bank is likely to dominate the discussion for the quarter. We see limited business concerns for Federal Bank and small finance banks like Equitas, AU and Ujjivan which are seeing steady improvement in core performance. Sharp rise in ticket size and risks emerging from rapid growth in MFI AUMs in eastern India would be a key discussion area for banks which have a high share of MFI loans.

(Edited extracts from Kotak Institutional Equities Research)