Teji Mandi: Banking Sector Q3 Preview - Large private banks expected to sail through
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The December quarter is expected to fare well for the larger private banks. The growth is returning after all! The Supreme Court’s impending decision on loan recast is still a big concern but, is the situation as bad as it was perceived to be? In today’s edition, we attempt to decode that riddle for our readers.

Private banks are poised for recovery in Q3, led by healthy traction in economic recovery. The expectations have gained further momentum after the strong update by the mighty HDFC Bank.

The bank in its quarterly update highlighted that Q3 was aided by a strong festive season. The bank's total advances grew 15.6% YoY in Q3. Its deposit base increased by 19.1% YoY. Current Account Savings Account (CASA) ratio increased 350 bps YoY to 43%.

Large private banks to outpace the industry :

Several indicators are pointing at positive momentum for the banking sector. Retail disbursements are showing healthy recovery led by Tractors, 2 wheelers, housing loans, and gold loans. Commercial vehicles and corporate loan demand remain tepid.

The large private banks, such as HDFC Bank, ICICI, AXIS and IndusInd, should outpace the loan growth in the banking sector. As per a Motilal Oswal report, large private banks should clock a loan growth of 9% YoY in the December quarter. The average industry loan growth average is expected to be at 4.5%.

Concerns over the asset quality:

The supreme court is yet to issue asset classification orders.

In this light, the possibility of asset quality deterioration remains a major concern. But, there has been a constant improvement in collection efficiency. And, the trends have been better than what was feared earlier.

Overall, large banks reported a collection efficiency of 95–97%. It has been around 90% for Mid-sized banks and Micro Finance Institutes. The slippages are likely to increase once the SC lifts the restrictions. But, the banks have made aggressive provisioning which will provide a cushion against any unforeseen events.

The bankers are still expected to continue making aggressive provisions in the third quarter as well.

The growth prospect:

For large private banks, loan growth is likely to see a moderate pick up. But, higher provisioning will continue to weigh on earnings. Margins are likely to be under pressure given lower lending rates, and high liquidity on the balance sheets. Larger private banks are comfortably placed even in this regard due to their lower cost of funding.

Outlook for the mid-sized private banks/PSBs:

The asset quality challenges are expected to be more severe for mid-sized banks. Their higher credit cost and weaker liability franchise will affect the earnings.

As for the public sector banks, barring SBI, earning is likely to remain under pressure. Their balance sheet continues to remain weak due to the higher proportion of MSME/SME loans. There is also a delay in the resolution of stressed accounts.

Closing comments:

The delay in the Supreme Court's order has bought some time for the banking sector to get their act right. The collection efficiency and slippage trends will be the key metrics to assess in the near term.

More clarity will emerge from the management commentary on the restructuring pool. This will be the key to assess the asset quality impact arising from the COVID-19 pandemic.

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