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MOSL: FINANCIALS - BANKS 1QFY18 Preview-Business growth remains moderate-Provisioning to mar earnings

​FINANCIALS - BANKS 1QFY18 Preview: Business growth remains moderate; Provisioning to mar earnings; Core PPoP to be under pressure

• ​Moderate corporate loan growth, excess liquidity chasing quality credit (pressure on yields) and the Reserve Bank of India's (RBI) directive for the provisioning on 12 accounts directed under Insolvency and Bankruptcy Code (IBC) are the key factors expected to impact earnings for the quarter. Backed by excess liquidity and a continued high CASA ratio (although lower than 4Q) in the system, cost of funds may surprise positively, especially for bulk lenders. We expect trading gains to remain flat/decline marginally v/s 4Q.
  
• Key things to watch out: a) Banks' comments on the exposures referred to the IBC, outstanding provisioning and the expected impact in the ensuing quarters, b) stake sale in strategic assets and capital raising plans, c) power sector exposure, d) comments/accounting on the large resolution (ESSAR, JP Associates) during the quarter and e) the trend in retail loan growth post demonetization (large banks better placed with CoF advantage). In our view, excluding power, most of highly levered sector stress exposures are well communicated/recognized by banks. Even in power, long-term restructuring in recent past would make it difficult to assess the asset quality impact for FY18.
  
• On a sequential basis, we expect profit growth to be slow for public sector banks (PSBs) as a whole due to higher provisions (offset in part by high investment gains). YoY growth is expected to be strong, as the base quarter had a lag impact of RBI AQR. We expect balance sheet clean-up for ICICIBC and AXSB to continue, which would impact their 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 IIB, YES, RBL and KMB to report PAT growth of ~25% YoY.