Q4 results: Five numbers that distinguish bruised from battered banks

Given that the Q4 of 2015-16 was horrifying due to RBI’s asset quality review, by the sheer low base, profits for the same quarter in 2016-17 would be pleasing to the eyes

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

Quarterly results of banks this time around would offer both the optical illusion of high profit growth and the harsh reality of a worse bad loan situation.

From the looks of how the sector indices and stocks have moved over the last three months, the veneer of profit growth has been factored in. Given that the fourth quarter (Q4) of 2015-16 was horrifying due to the Reserve Bank of India’s asset quality review (AQR), by the sheer low base, profits for the same quarter in 2016-17 would be pleasing to the eyes.

But the ground realities over bad loans are still the same. Investors therefore should focus on the five following numbers to judge how deep banks are in the bad-loan cesspool:

Provisions: Those who had hoped for a better life after AQR are doomed to be disappointed. The gist of AQR was to identify and provide for all bad loans but lenders had hoped for quick deal-making and faster resolution thereafter. This hasn’t happened and due to ageing of non-performing assets (NPAs), provisions are unlikely to abate. With past mistakes continuing to haunt banks, corporate focused lenders such as ICICI Bank, Axis Bank and most public sector banks will continue to see erosion in profits through higher provisioning. To add insult to injury, the run-up in bond yields would trigger mark-to-market provisioning as well.

Slippages: The trend in fresh slippages is perhaps the most awaited from banks because it is a gauge of how non-AQR loans have performed. Here several banks have primed investors with watchlists but past quarters have shown that trouble is brewing outside these watchlists as well. Fresh slippages for most banks had declined in the September quarter, while the impact of demonetization made them rebound in the December quarter. That of the March quarter will be the litmus test.

Gross and net NPA ratios: These ratios could be tricky as they could show a decline from the year-ago period and that wouldn’t necessarily mean banks have finally got a grip on their bad loans. There is also a chance that gross and net NPA ratios may worsen because of the collapse in credit growth. Analysts at Icra Ltd expect the gross NPA ratio would hit 10% for FY17 from 7.6% in the previous year. Again, retail-focused banks win hands down here too.

Core income: This is one metric that will set apart the bruised from the battered among banks. Lenders such as Kotak Mahindra Bank, Yes Bank, Federal Bank and IndusInd Bank would shine on net interest income or the income generated from core operations. Public sector banks and some private sector lenders such as ICICI Bank and Axis Bank would suffer as there are no takers for loans from the corporate sector. Analysts expect public sector lenders to show core income growth of just 5%, while private sector lenders may show around 10%.

Margins: Net interest margins could take a beating simply because banks faced a deluge of deposits in the wake of demonetization and a lion’s share of these deposits have been deployed in low-yielding government bonds due to low credit demand.

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