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Provisions, weak credit growth to keep bank profits subdued

Bank credit growth also has remained anaemic at around 6% due to weak investment demand.

, ET Bureau|
Oct 09, 2017, 08.10 AM IST
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Bank credit growth also has remained anaemic at around 6% due to weak investment demand.
Bank credit growth also has remained anaemic at around 6% due to weak investment demand.
Elevated provisions, weak credit growth and some hit on consumption due to the implementation of the goods and services tax (GST) will keep bank profits subdued in the second quarter of the current fiscal year.

Provisions will increase as banks will have to set aside a higher amount for the 12 large accounts, which were referred to the NCLT by RBI and also as some new accounts have been admitted to the NCLT during the quarter. IndusInd Bank will kick off the banking results season with its announcement on Thursday.

Bank credit growth also has remained anaemic at around 6 per cent due to weak investment demand, which means that loans growth and interest income for lenders especially those dependent on corporate loans will remain weak. Retail-focussed banks are likely to do better like they have done in the past several quarters.

"We expect Q2FY18 to be yet another soft quarter characterised by tepid revenue momentum and elevated credit costs," Edelweiss Securities said in a note last week. "Earnings of retail-heavy private banks are expected to be stable. However, corporate-heavy banks are likely to incur elevated credit costs (ageing provisions, provisions on 12 accounts referred to NCLT by RBI), while impact of second list will be key monitorable."

In late August, RBI sent a second list of 40 defaulting companies to lenders, to be taken for a resolution in the NCLT under the Insolvency & Bankruptcy Code (IBC). It is likely that some banks may increase provisions to cover for these accounts though they have time till December end to do so.

"Provisions will also be higher for loans to some companies, which are struggling for survival like Reliance Communication. I think banks have to now look at how much they need to provide for these companies. In other words, provisions for banks will remain elevated or go higher," said Manish Ostwal, analyst at Nirmal Bang Securities. This diversification is a marriage of best of almost all categories in mutual funds besides taking into account the tax benefits also.

Balanced funds provide the best of equity and debt while equity savings schemes is a mix of equity , debt and arbitrage schemes. Equity savings schemes invest 30-35 per cent of the portfolio in equities and the remaining in debt and arbitrage. This structure provides comfort to new investors as the possibility of fall in returns of these schemes is quite low given its diversification.

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