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Business News/ Money / Personal-finance/  Demonetization may help banks turn profitable in third quarter: CLSA analyst
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Demonetization may help banks turn profitable in third quarter: CLSA analyst

Sharp increase in low-cost current and savings account deposits as well as improved treasury profits will help banks, says CLSA's Aashish Agarwal

Aashish Agarwal, country head of research at CLSA. Photo: Ramesh Pathania/ MintPremium
Aashish Agarwal, country head of research at CLSA. Photo: Ramesh Pathania/ Mint

Indian banks, especially the state-owned ones, could see better third-quarter results as a consequence of demonetization, according to Aashish Agarwal, the country head of research at Asia-based equity broker CLSA Ltd.

A sharp increase in low-cost current and savings account deposits, as well as improved treasury profits due to falling interest rates, could lead to better results for banks in the second half of 2016-17, Agarwal said in an interview.

“Demonetization will have two or three big benefits for the banking system as a whole. Banks will get a lot of CASA (current and savings account) deposits coming at a huge spread to them. They will be paying an interest of 2-3% on deposits and will be deploying them at 6-7%. This gives them a spread of 3-4% on a huge sum of deposits over a long period of time," Agarwal said. “It will also improve liquidity, which will bring down interest rates. When interest rates come down, banks will make treasury gains on the total investment book."

The benefits will mainly accrue to state-run banks as they have been at the forefront of opening Jan Dhan bank accounts that could see huge inflows, Agarwal said, adding that since public sector banks are less profitable at present than private banks, the incremental gains to state-owned lenders will also be higher as a percentage of profits.

Around 20-25% of state-owned banks’ profits in the third-quarter could be on account of monetization, said Agarwal.

The fact that most state-owned banks declared losses in the third quarter last year, consequent to the asset quality review initiated by the Reserve Bank of India (RBI), would add to the base effect.

“State-owned banks are likely to report profits in the second half of the year as the pace of NPL (non-performing loans) addition falls and because of demonetization," Agarwal said.

This could ease the pressure on state-run banks, some of whom have reported consecutive quarterly losses as they had to set aside more funds for bad loans to meet RBI’s provisioning requirements.

However, banks could also see some pain due to demonetization after the first 6-8 months. This is because the negative impact of demonetization on consumption and sectors such as real estate could get reflected in banks’ balance sheets.

“The liquidity crunch will affect SMEs (small and medium enterprises) more. And again the impact is likely to be more on state-run banks. So you will see a fresh cycle of NPAs (non-performing assets) in 6-8 months but it will be a smaller exposure," Agarwal said.

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Published: 16 Nov 2016, 11:02 AM IST
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