The banking sector is likely to show easing of asset quality pressure in June quarter numbers compared with the numbers for the sequential quarter ended March 2018. However, bottom lines are likely to remain muted for both PSU lenders as well as corporate private banks.

ICICIdirect.com expects gross non-performing assets (GNPA) of lenders under its coverage to increase 21 per cent year-on-year to Rs 3,36,134 crore against a 30 per cent traction witnessed in the previous quarter.

The high stress in Q4FY18 was on account of large-scale stress recognition done by banks on account of events like frauds during the quarter and primarily led by new NPA framework introduced by the Reserve Bank of India (RBI).

Net interest margins (NIM) may show some improvement on account of lower slippages on quarter-on-quarter basis (QoQ) and increase in MCLR rates by banks.

Market experts believe NII (net interest income) growth is expected to be healthy at around 14 per cent YoY to Rs 47,938 crore against 5 per cent YoY seen in the previous quarter. Private lenders may post NII growth of around 19.3 per cent YoY.

Despite easing of NPA pain, credit cost i.e. provisioning expenses, is estimated to stay high owing to ageing of recognised non-performing assets (NPAs). Headline earnings at banks will be impacted by higher bond yields this quarter as well, driving higher MTM bond provisions.

“Earnings would remain muted for PSU and corporate-based private banks. Further, around 50 bps rise in G-sec yields in Q1FY19E would impact earnings, due to lower treasury gains and rise in MTM provisions,” ICICIdirect said in a report.

Global brokerage Morgan Stanley expects strong earnings for retail banks driven by strong growth and broadly stable margins with improving cost to income ratios and stable asset quality. HDFC Bank is Morgan Stanleys top pick in this space.

The global brokerage expects stable loan growth and margins to drive 17 per cent growth in net interest income at HDFC Bank. Fee income should moderate to around 15 per cent YoY, driven mainly by a strong base. The brokerage expects continued improvement in costs to drive good around 18 per cent YoY growth in core pre-provision operating profit.

“Credit costs should moderate (85bps vs. 96bps) after staying elevated over the past few quarters (owing to higher slippages led by demonetisation and farm loan waivers in F18). Bottomline growth is likely to be stable at 20 per cent YoY,” Morgan Stanley said in a report.

Coupled with a few large NCLT recoveries during the quarter (Bhushan Steel – Rs 55,000 crore, 0.6 per cent of system loans, around 37 per cent haircut; Electrosteel – Rs 13,000 crore, 0.2 per cent of system loans, around 55 per cent haircut), Morgan Stanley expects both impaired loans and coverage to continue to improve.

Among various corporate lenders, the global brokerage firm expects ICICI Bank, SBI (most exposed to NCLT recoveries this quarter) and YES Bank (strong growth and improving asset quality) to do well.

Nirmal Bang Securities in a report said, “We expect 1QFY19 to be the last (or second last) quarter of major stress recognition for key individual names before they settle into a more normalized slippage rate thereafter.”

Slippages of fraud-hit Punjab National Bank should remain elevated at Rs 10,000 crore (Rs 28,800 crore last quarter), according to Morgan Stanley. It expects the bulk of slippages from existing impaired loans, led mainly by fraudulent transactions recognition, part of which was deferred in F19.

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