Banks Q4 Preview: Asset quality expected to stay stable, focus to be on management commentary
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The upcoming earnings season will mark an important event for the Indian banking system. After receiving a green signal from the Supreme Court, the banks will be recognizing bad loans for the first time in the last four quarters.

On expected lines, large private banks are expected to dominate the earnings season. Among public sector banks, SBI is likely to strengthen its position further. A Motilal Oswal report estimates overall systemic loan growth to be at 6.8% for FY21. Private banks are expected to outpace the industry with loan growth of ~11% YoY.

Asset Quality to Remain Stable

The asset quality is likely to remain stable for the large private banks given the sustained pace of economic recovery. They have reported a significant improvement in collection efficiency over the last couple of quarters. And, their pro-forma NPA numbers were also at a very comfortable level.

Private banks have made aggressive provisions in the previous quarters. It is a major comforting factor against any unforeseen events in terms of asset quality deterioration. Provisioning requirements are likely to moderate in the fourth quarter. But larger private banks are likely to continue with aggressive provisioning to strengthen their balance sheets.

Improved Earning Outlook

With an uptick in economic recovery, systemic loan growth is showing signs of a revival. Banks remain cautious on unsecured products like credit cards. But disbursement across various retail products – such as 2W, Home, Auto, LAP, and Gold loans – has surpassed pre-COVID levels.

Even growth in the corporate segment has revived with growing demand for working capital.

Expect Strong Deposit Growth, Stable Margins

Deposits are expected to gain strong traction with 12% YoY growth for FY21. Many banks are putting more focus on increasing retail deposits.

RBI's accommodative monetary policy has resulted in lower lending rates. The cost of funds is also likely to remain low, given the excess liquidity in the system. It will help large private banks to tackle the margin pressure.

PSBs and Mid-Sized Private Banks

Public sector banks are expected to deliver improved performance in Q4, led by the low base effect of last year. Within this space, SBI is expected to outperform others. The resolution of Bhushan Power & Steel will also boost the other income of the bank.

Mid-sized private banks are expected to face challenges on the asset quality front. Their overall portfolio and collection efficiency is expected to remain weak as compared to their larger peers.

Closing Comments

Management's commentary on slippages and provisioning, margin outlook, loan growth, and cost of funds will be the key metrics to assess the COVID impact and future growth prospects. It will help in determining future trends on asset quality.

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