Covid 2.0 casts cloud of uncertainty on banks' Q4 nos

Mumbai: The banking sector got back to some sense of normalcy in the fourth quarter as collection efficiency came close to or at pre Covid levels, loan growth recovered and clarity emerged after the Supreme Court (SC) order gave its final verdict in cases related to moratorium on loans.However, a resurgance in Covid 19 cases, leading to localised lockdowns in various states has analysts again look out for risk mitigation measures by banks at the end of the financial year."Since there has been a resurgence in the pandemic and partial lockdowns, there is a likelihood of a delayed recovery in credit offtake. Hence, the growth outlook presented by the management would be key to watch. In addition, preliminary assessment of impact of partial lockdown, especially on micro small and medium enterprises (MSME) and micro finance segment will remain in focus as it would lay the foundation for future earnings trajectory," ICICI Direct analyst Kajal Gandhi said. 81979757Analysts expect banking sector loan growth to recover to 6% to 7% in the fiscal ending March 2021 mainly due to a growth in retail loans in the second half of the year. Large lenders with a wider network are expected to clock in a higher year on year increase with a double digit increase in credit growth. HDFC Bank is the first among large lenders to release its results on April 17.A rise in yields during the quarter will dampen earnings for banks. The benchmark 10 year government security rise 28 basis points during the quarter ended March. One basis point is 0.01 percentage point."Data suggests that banks have not cut deposit rates neither MCLR (marginal cost of funds based lending rate) cut has been passed on, so we expect negligible impact on the margins during the quarter. However, higher liquidity on the balance sheet observed during Q3FY21 expected to decline during Q4FY21 which could support margins. Treasury income should see decline on sequential basis as 10 year Gsec has risen by about 28 basis points during the quarter. As a result banks are expected to report lower treasury profits sequentially," said IDBI Capital analysts Bunty Chawla and Nikhil Vaishnav said in a preview report.Banks enjoyed a standstill on classifying loans as non performing last fiscal and also accounted for interest accrued despite not receiving payments during the quarter. Both these leeways will no longer be available after the final SC order in March.As a result bank NPAs are likely to spike and more importantly they may have to reverse some interest earned on loan accounts above Rs 2 crore as the SC order has directed banks to charge simple and not compound interest on loans between March and August 2020.It is estimated that banks could face a hit of between Rs 7000 crore to Rs 10,000 crore due to the reversal of interest as it is unclear whether the government will reimburse this waiver – as it earlier did for small-ticket advances.Analysts will watch out whether banks will provide for the write back on compounded interest as directed by the apex court or adjust it through their Covid 19 provisions already accounted for.Centrum Broking analyst Gaurav Jani said that large banks like ICICI with extra capital buffers will be better placed to deal with emerging challenges."COVID stress might be further recognised in Q4FY21 and the recent COVID surge and its impact would be keenly monitored. Centrum expect State Bank of India's slippages to rise and to remain at previous quarter levels for ICICI and Axis. Final clarity on the restructuring books of banks is likely to emerge as March 31 was the last date for restructuring loans to MSMEs. "Focus will be on management commentary on impact of restructured assets on quarters going ahead and provision requirements for the same. We expect banks could utilize provisions kept against covid-19 impact during Q4FY21 as slippages will be higher and minimum 10% provisions required for restructured assets. Slippages + Restructured assets will be the key figures to be watch out for," Chawla and Vaishnav from IDBI Capital said.

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