Better safe than sorry has never been more relevant to Indian banks.
The first quarter results of Indian banks would kickstart today with IndusInd Bank announcing its numbers later in the day.
While investors will monitor several parameters to determine which banks are safer and which would be sorry, the provision coverage ratio (PCR) is expected to be a deciding factor.
After all, insurance against risks is the best way to ensure future profits.
In its financial stability report, Reserve Bank of India (RBI) noted that there is a wide disparity between banks with regards to PCR. “PSBs, in particular, showed a range of 42% to 74% in PCRs," the report said.
Analysts believe that banks having superior PCR would be better placed to tide over any future stress and therefore are more likely to show improved profitability for the June quarter.
Kotak Securities noted that private banks mainly into corporate lending such as ICICI Bank and Axis Bank will benefit given their superior provision levels.
For the March quarter, ICICI Bank’s PCR was 80.7% while that of Axis Bank was 77%.
“We believe large banks with a strong liability franchise and higher provision coverage are well-placed vis-à-vis others, and therefore should attract premium valuations," said analysts at Reliance Securities in a recent note.
Lenders that start with a high level of PCR may not need to make large incremental provisions towards stressed assets.
RBI’s report noted that public sector banks have seen the sharpest improvement in PCR. On aggregate level, public sector lenders saw their PCR rise to 60.6% in March from 48.3% a year ago. The PCR for private banks was lower at 57%.
As for provisions, analysts believe that lenders are likely to increase provisions to beef up the PCR and deal with the fresh stress seen in Q1.