Mumbai: Public sector banks may report single-digit growth in third-quarter net profit, but without trading gains, core profitability may be almost flat, analysts said.
IDBI Bank Ltd will the first among major government-owned banks to report third-quarter earnings on Friday. Private sector banks have already started reporting results with Axis Bank Ltd and Yes Bank Ltd declaring higher-than-expected profit in the last quarter.
According to Bloomberg consensus estimates, net profit at top state-run lenders such as State Bank of India (SBI), Bank of Baroda and Bank of India will rise 10.27%, 0.25% and 6.49%, respectively, while that of Punjab National Bank (PNB) will fall by 0.14%. PNB is the second biggest state-owned bank.
Operating profits of most public sector banks are expected to remain muted, but a bond rally near the end of the year could help boost their net profit. Thanks to bond purchases by the Reserve Bank of India (RBI) from the secondary market, the treasurers of government-owned banks have managed to make substantial trading gains.
In calendar 2012, bond yields fell more than 0.50% to end the year at 8.05%. Bond prices and yields move in opposite directions. Banks sold bonds that they had acquired in 2011 and early 2012 to RBI and booked profits.
RBI bought about Rs.40,000 crore worth of bonds from the secondary market, most of them illiquid and held by state-owned banks, in the quarter. The bond buy-back also lowered yields, aiding the lenders in liquidating their holdings in the market.
Stock markets also performed well in the quarter, allowing the banks to sell holdings. The benchmark Sensex gained 25.7% in calendar 2012 and rose 3.54% in the third quarter.
Kingfisher Airlines Ltd was a drag on their numbers, however. They had to sell the stock of the stricken airline to cut down losses, Business Standard newspaper reported on Wednesday.
When it comes to core operating profit, banks will likely have a dull third quarter as a slowdown in economic activity forced companies to rein in their capital-intensive projects. Loan growth in the banking system was 15.1% from the year-ago period.
However, the pace of deterioration in asset quality will likely be slower in the quarter, but still at an elevated level, as the major restructuring has been completed in the previous quarters. The previous quarters saw provisions against bad debts being factored in, hence this is likely to have been lower in the quarter, aiding earnings.
Bad debts as a percentage of total public sector bank assets were a cause of concern among all analysts. At 5.54%, Mumbai-based Central Bank of India reported the highest share of its assets as bad in the second quarter. It was followed by the country’s largest lender SBI at 5.15% and PNB at 4.66%. The bad debt situation is expected to continue for some more time.
“Amid expectations of slow domestic recovery and near-term prospects of the euro zone’s revival weak, we remain cautious on growth prospects and asset quality of banks going ahead,” said a report from Nirmal Bang Institutional Equities Research.
While gross non-performing assets (NPAs) may have grown as much as 39.2% on a year-on-year basis, profit may rise by an average 9.2% for state-owned banks, the report said. The report expects restructured standard loans to increase 66.2% on a year-on-year basis amid sustained pain from stressed sectors.
In the past two quarters, a major drag in the bank profitability has been the troubled account of Kingfisher Airlines. With a debt of Rs.7,500 crore, the airline hit banks’ profitability as loans were not serviced and turned into bad assets, requiring them to set aside money to cover the risk of default.
Banking stocks, particularly those of public sector lenders, have rallied as much as 10% in the last three months, with the market expecting a 20% rise in profit growth, and on the expectation that rate cuts in the coming months will boost credit off take.
That optimism may not be borne out, according to a Citigroup note.
“The sector’s pre-provision (ex-trading gains) growth should be more modest at 4% y-o-y (15% y-o-y for private, -2% y-o-y for government),” said the 10 January note. This is largely in line with the September quarter.
Citigroup expects loan growth to moderate below 15% for the banking system as a whole and asset deterioration to continue, albeit at a slower 5% on a quarter on quarter basis. However, a leap in trading gains—as much as three times from the year ago quarter—will lead to 20% growth in profit for the banking sector from the year ago.
Analysts are hopeful the banking sector will turn around soon.
“The incremental slippages of PSU (public sector unit) banks in H2FY13 (second half of fiscal 2013) are likely to be significantly lower than H1FY13, while the asset quality of banks, especially PSU banks is expected to turn around from Q1FY14 onwards,” said Karvy Institutional Research in a 16 January report.
“Incremental recovery/upgradation is expected to excel and match incremental slippages thereby maintaining absolute GNPAs (gross NPAs) at current levels,” wrote Karvy analysts Hatim Broachwala and Paresh Jain.