MOSL: FINANCIALS - BANK 3QFY18 Preview-Earnings growth to remain modest

​FINANCIALS - BANK 3QFY18 Preview: Earnings growth to remain modest

• The key factors expected to impact earnings for the quarter are: (a) tepid corporate loan growth, (b) rising bond yields impacting treasury income, and (c) progress on stressed asset resolution under Insolvency and Bankruptcy Code (IBC) and incremental provisioning on the second list of NCLT referred accounts. Backed by excess liquidity and continued high CASA ratio in the system, cost of funds may remain benign, especially for bulk lenders. We expect trading gains to correct sharply from previous quarters with increase in bond yields.
  
• Key things to watch for: (a) Banks’ commentary on the second list of exposures referred to the IBC and any changes in incremental provisioning needed by FY18, (b) progress in resolutions under the first NCLT list and possible change in expected haircut with amendments to the IBC, (c) stake sale in strategic assets and capital raising plans, (d) any comments on pickup in corporate capex, and (e) trend in retail loan growth post demonetization (large banks better placed with CoF advantage). In our view, excluding power, most of the highly levered sector stress exposures are well communicated/recognized by banks; however, there could be surprises in the case of existing restructured/SDR cases being referred to NCLT. In the power sector, long-term restructuring in the recent past would make it difficult to assess the asset quality impact for FY18.
  
• On a sequential basis, we expect profit growth to pick up for state-owned banks as a whole with moderation in provisions. YoY growth is expected to be strong on a benign base, more so for state-owned banks. We expect incremental stress addition for ICICIBC and AXSB to decline significantly. However, credit costs will remain high, weighing down on profitability. Mid-sized private banks would continue to outshine peers due to continued market share gains (loan growth of 4-5x system), stable asset quality, and stable-to-improving margins (sharp fall in bulk deposits). We expect PAT growth of ~25% YoY for IIB, YES and KMB, and over 40% YoY for RBL.