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For India’s banks, the September quarter is likely to bring good news on both growth and asset quality. Early updates by select lenders indicate that loan disbursements and collections have bounced back from the impact of the second covid wave.

At the aggregate level, both public sector banks and their private sector peers may report a jump in net profit as the need to make high provisions would have come down. Coupled with the recovery from the Dewan Housing Finance Corp. Ltd (DHFL) account, lenders would find earnings getting a big boost. Analysts expect a decent sequential improvement in almost all indicators from loan growth to gross bad loan ratios. Comparison with the year-ago period would show a better metric given the base effect. “For banks we cover, we see a rebound in profit (up 20% year-on-year and 9% quarter-on-quarter) with a combination of pick-up in core income and moderation in credit costs. We see NII (net interest income) growing by 7% y-o-y and 3% q-o-q and, more importantly, fees rising by 17% y-o-y and 9% q-o-q, reflecting normalization in lending and cross-selling businesses," wrote analysts at Jefferies India Pvt. Ltd.

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marginal growth

NII growth has been hit hard in the aftermath of the pandemic due to a rise in stress and a drop in loan disbursements. Notwithstanding a recovery in the second half, most banks reported low NII growth for FY21. That trend stretched to the June quarter of 2021 because of restrictions imposed during the second wave of the pandemic. However, loan disbursements, especially retail, have bounced back during the September quarter. As of August, retail loan growth for the banking system was 12.5%, higher than the overall loan growth of 6.7%, according to data from the Reserve Bank of India (RBI).

Buoyed by festive season demand, banks are likely to see further improvement in the remaining quarters. HDFC Bank Ltd, Bandhan Bank Ltd, and IndusInd Bank Ltd have reported improvement in loan growth. This would translate into strong recovery in core interest income growth.

Another factor helping core income growth would be steady margins. Deposit rates of banks have trended lower with most lenders witnessing a sharp fall in cost of funds. Analysts expect private sector banks to show more improvement in net interest margins than public sector banks. This is because private sector lenders have maintained a higher level of lending rates on a weighted average basis compared to their public sector peers.

The upshot is that NII growth of private sector banks would be superior to that of public sector banks. Given the increase in other fee-related businesses, banks can expect a decent increase in non-interest income as well. That brings us to asset quality, another important factor determining profitability of banks. Analysts expect some relief here for lenders though this is likely to be limited. Collections have improved sharply for most lenders, which augurs well for bad loan ratios. The restructured loan pile may also remain steady.

That said, lenders who have an exposure to SREI group companies may find it tough to keep their provisions under check. As such, most banks have labelled the loans to the group as bad during the quarter. What is more is that stress among small businesses has hardly reduced. Thus, banks with a high exposure to small businesses may find it tough.

Yet another damper could be vehicle loans. Fresh stress formation will remain elevated for vehicle loans, loan against property, and microfinance, said analysts at Emkay Global Financial Services Ltd. The stress in small business loans would be seen through restructuring, they said.

Trends in asset quality could be mixed for the September quarter depending on the extent of lenders’ exposures to vulnerable loan portfolios. Therefore, provisioning would vary among lenders. As such, some banks may choose to build provisions in anticipation of stress in the coming quarters.

The optimism surrounding loan growth and steady asset quality is visible in the movement of banking shares. The Nifty Bank Index has gained 10% since July. Shares of large lenders such as HDFC Bank, ICICI Bank, and Axis Bank have moved faster. That said, the sector index has underperformed the broader Nifty, which has gained about 14%.

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