On September 20, finance minister Nirmala Sitharaman announced to cut the corporation tax rate by almost 10 percentage points, effective from FY20. Consequently, banks with high DTA faced a negative impact on their net profit.
At the bourses, however, stocks of most of the large private banks
have rallied since the announcement. ICICI Bank (up 29 per cent), YES Bank (19 per cent), HDFC Bank (16.5 per cent), Axis Bank (15.5 per cent), and IndusInd Bank (13 per cent) outperformed the benchmark Nifty50. In comparison, the benchmark rose 12 per cent during the period under review till November 21.
TREASURY GAINS SUPPORT WEAK ASSET QUALITY
The quarter gone by saw mixed results in terms of asset quality. Among key private players, only ICICI Bank and Axis Bank reported a fall in gross non-performing assets (GNPA) on YoY basis. YES Bank, RBL Bank, IndusInd Bank, and HDFC Bank, meanwhile, reported up to 343 per cent YoY rise in GNPAs.
According to Reliance Securities, moderation in slippages and sequential decline in cost of funds/deposits across banks aided margin growth in Q2FY20. Overall, Net interest income (NII) and operating profit grew 20.6 per cent and 25.2 per cent, respectively during Q2FY20.
Kotak Securities estimate growth in non-interest income at more than 30 per cent driven primarily by strong treasury gains in 2QFY20 compared to treasury losses in the prior-year quarter.
BETTER RECOVERIES AHEAD
Siddharth Purohit, a research analyst at SMC Global Securities, however, is counting on better recoveries in the coming quarters after the Supreme Court’s ruling in the Essar Steel case.
Coupled with recoveries from smaller accounts, the ruling is expected to pave way for the resolution of more big-tickets cases stuck in National Company Law Tribunal (NCLT), which could provide support to the asset quality, he adds.
"Further, the government’s decision to include financial services providers under the ambit of IBC would reduce the fears of default in the non-banking financial institutions (NBFCs) sector,” he says.
The SC, on November 16, ruled in favour of lenders in the Essar Steel case and reiterated the primacy of the committee of creditors in the resolution process.
As for credit off-take, analysts at Kotak Securities expect loan growth to pick up as asset quality concerns recede.
“Loan growth slowed down at all banks except HDFC Bank, Axis Bank. IndusInd Bank, RBL and YES witnessed steep deceleration in loan growth led by asset quality issues. While YES Bank’s loan book declined 6 per cent YoY, Axis Bank and ICICI Bank reported modest loan growth at 13-15 per cent,” wrote analysts at Kotak Securities in their sector review note
As an investment strategy, Purohit of SMC Global Securities suggests buying ICICI Bank, HDFC Bank and IndusInd Bank, while accumulating Axis Bank.
Reliance Securities, too, has ‘buy’ rating on HDFC Bank (target price: Rs 1430) and ICICI Bank (TP: Rs 570). The brokerage, however, has ‘hold’ rating on IndusInd Bank (TP: Rs 1,340) and ‘buy’ on Axis Bank (TP: Rs 800).