Mumbai: June quarter earnings reports from HDFC Bank Ltd, Kotak Mahindra Bank Ltd and Axis Bank Ltd due on Thursday and Friday are expected to indicate asset quality conditions in the banking sector and throw light on the impact of a new interest rate regime. Private sector banks are expected to outperform their state-owned peers this quarter as well, analysts said.
According to a 11 July report from Motilal Oswal Securities Ltd, HDFC Bank is expected to report its usual 20℅ year-on-year net profit growth on the back of a healthy net interest income growth and lower operating cost from using technology for customer acquisition and expansion. Other brokerages also predicted strong net profit growth for HDFC Bank.
According to a 11 July report by PhillipCapital (India) Pvt. Ltd, HDFC Bank’s net interest income (NII) growth is likely to remain below its loan growth on expectation of sequential and year-on-year fall in yield on advances, which will reflect in net interest margin (NIM) numbers.
On 1 April, banks were required to introduce marginal cost based lending rate (MCLR), which requires them to set lending rates based on their marginal cost of funds rather than their average cost of funds. HDFC Bank has seen a steady drop in its lending rates over the last three months due to this. The private sector lender’s one-year MCLR is at 9.15℅, similar to that of larger banks like ICICI Bank and State Bank of India.
Kotak Mahindra Bank, which is also announcing its results on Thursday, will be doing so after a year of one-off benefits from its merger with ING Vysya, which was initiated in the April-June quarter last year.
“Operating expense is expected to decline sequentially owing to few one-off expenses. Profitability is likely to improve sequentially due to improved core operating performance,” Reliance Securities said in a report on 8 July.
However, Kotak Mahindra Bank’s slippages during the quarter are likely to be higher than the bank’s previous guidance. While announcing its results for January-March, the bank had said that it would target a credit cost of 45-50 basis points (bps) in 2016-17, against 82 bps in 2015-16.
One basis point is one hundredth of a percentage point or 0.01℅.
All eyes on Friday will be on Axis Bank’s stressed asset number and its guidance for the year ahead. In the last quarter of 2015-16, the bank had revealed a watch list of Rs.22,630 crore loans, aimed to bring transparency in the bank’s balance sheet.
According to Motilal Oswal, over the next eight quarters, about 60% of this watch list is likely to turn into the non-performing asset (NPA) category.
“We expect slightly higher proportion of slippages in 1HFY17, leading to higher credit costs (150bp annualized v/s 74bp in 4QFY16),” the Motilal Oswal report said.
Axis Bank, much like its public sector peers and ICICI Bank, had shown an increase in its gross NPA number in the six months between October and March, after the Reserve Bank of India (RBI) conducted an asset quality review (AQR).
Following this review, banks were required to report more accounts as NPA and provide more against stressed assets. The higher provisioning had impacted their net profit numbers.