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MOSL: FINANCIALS - BANKS 1QFY19 PREVIEW-Pace of NPL formation to moderate; credit cost to stay elevated

Financials - Banks 1QFY19 PREVIEW: Pace of NPL formation to moderate; credit cost to stay elevated on higher ageing provisions; Maintain cautious stance on asset quality of corporate banks

 

• Earnings growth to revive sequentially; YoY trend though remains muted: We expect YoY earnings growth to stay muted led by elevated provisions as banks continue to purge their balance sheet of residual stressed assets while ageing of legacy NPLs will further necessitate higher provisions. However, profitability is likely to improve sequentially, aided by a benign base, as 4QFY18 earnings were dragged by multiple headwinds from revised framework-related slippages, MTM provisions and enhanced gratuity provisions. With cost of funds under pressure, the NIM is likely to stay flattish, except for some PSU banks where moderation in interest reversals may result in a higher NIM. Further, MTM losses are likely to be elevated as bond yields have further increased during 1QFY19. We expect private banks to report 3.1% YoY growth (27.4% YoY growth excluding ICICIBC and AXSB; mid-sized private banks to report ~25% YoY growth) while PSU banks are expected to return to profitability (with the exception of PNB).
• Credit growth for the sector picking up: Sectoral credit growth has shown an uptick – it stood at 12.3% YoY as of 8th June 2018, led by continued traction in retail/working capital loans. We expect the momentum in retail loan growth (19% YoY currently) to continue (mortgages, auto) while pick-up in corporate capex will likely remain muted as companies wait NCLT asset auctions before making green-field investments. However, credit growth could be restricted by deposits growth, which has been challenged at an industry level.