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Banks’ Q3 profits to be hit by mark-to-market losses, say analysts

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banks profit, banking sector profit in third quarter, third quarter banking sector profit Impairment ratios may also see some improvement as the impact of farm loan waivers and demonetisation on small-ticket loans wears off. (Reuters)

Banks and non-banking financial companies (NBFCs) are likely to report a 5% year-on-year (y-o-y) growth in net profit for the October-December quarter due to the impact of mark-to-market (MTM) losses on bonds and provisioning for stressed assets, according to analysts at Kotak Institutional Equities (KIE). On a sequential basis, profit growth may be better at 9.6%, the brokerage said. “We see public banks reporting lower slippages q-o-q (quarter-on-quarter), but high provisions will continue,” KIE wrote in a report on Tuesday, adding most banks will see lower treasury gains, which are likely to fall around 67% y-o-y and 75% sequentially. “Public banks could report losses primarily due to MTM impact on their investment portfolios,” the brokerage said. KIE expects headline earnings for the sector to decline by about 31% y-o-y, with public-sector banks (PSBs) contributing to much of the decline. Margins may range between stable and negative and credit costs are likely to remain elevated at around 2% for the sector. Loan growth may improve to 18% y-o-y from 7% in the quarter ended September, driven largely by retail loans.

Impairment ratios may also see some improvement as the impact of farm loan waivers and demonetisation on small-ticket loans wears off. “We expect a pullback in the retail and SME (small and medium enterprise) loans, but recovery in agriculture is likely to be slower,” KIE wrote. Analysts will also be watching developments on large accounts referred to the National Company Law Tribunal (NCLT) and those from the Reserve Bank of India’s second list, some of which may be taken to NCLT during the course of the results season.

There are unlikely to be fresh surprises on the bad-loans front, said analysts at Motilal Oswal Securities (MOSL). “In our view, excluding power, most of the highly levered sector stress exposures are well communicated/recognised by banks; however, there could be surprises in the case of existing restructured/SDR (strategic debt restructuring) cases being referred to NCLT,” the brokerage said in a note.

MOSL expects PSBs to report some moderation in provisions. Incremental stress addition for ICICI Bank and Axis Bank may decline significantly, the brokerage said, even as credit costs remain high, weighing on profitability.


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