Profits of banking, financial services and insurance (BFSI) sector dropped by 3% in the second quarter of the current fiscal due to weak revenue growth and higher provisions, says a report.
According to the report by Kotak Institutional Equities, earnings were earlier expected “to move to the positive zone” during July-September quarter, but remained sluggish.
“As in the past few quarters, earnings are still sluggish, with Q2 FY16 reporting a decline of 3% year-on-year while we expected it to move to the positive zone,” the report said, adding that the sluggish performance was “led by weak revenue growth and high provisions”.
The report also noted that gross non-performing loans (NPLs) increased to 4.3% of the advances. The NPLs stood at 5.3% for public sector lenders and 2.1% for private banks.
As per the report, large private banks have started indicating that the stress levels in their balance sheet are gradually easing and believe that fiscal 2014-15 “was probably the weakest period from an impairment perspective”.
“However, public sector banks continue to be impacted by the restructured portfolio where they are currently witnessing a higher share of slippages,” it added.
Kotak also found that overall provisions increased 31% but loan-loss provisions increased 41% with a large share of provisions for impaired loans.
It further noted that loan growth (under coverage) for the second quarter was the lowest in recent years at 10%. This is due to non-recovery in demand from the corporate segment while alternate channels have also opened up, the report said.
“Divergence continued between public (6% year-on-year) and private (19% year-on-year) banks primarily due to the nature of the loan portfolio and private banks looking to rebuild growth in the corporate segment,” the report said.
“We see loan growth, and consequently revenue growth, as the key challenge that is likely to continue in the next fiscal as we see little evidence of corporate demand as banks have negligible sanction pipelines,” it added.
On the positive side, Kotak said revenue and earnings growth should improve largely as the treasury book shows positive contribution. SBI, among public banks, and HDFC Bank, IndusInd and Yes Bank among private banks reported strong results in the second quarter of the current fiscal.