Fall in CDR cases signals worst may be over for banks

MUMBAI: Brushing aside credit quality blues, India's banks may start bracing up for better days ahead after announcing their first-quarter results. Although analysts covering the sector don't expect any major improvement in their AprilJune show, they say the worst is clearly over for the lenders.

The top three private banks ICICI Bank, HDFC Bank and Axis Bank may report a year-on-year net profit growth of 15-28 per cent, indicate analyst projections. On the other hand, SBI and PNB are expected to see a 5-10 per cent decline in profit, while BoB, may report marginal growth.

"In the first two quarters of FY15, there will not be any significant change in term of asset quality , but the worst is left behind us, with falling CDR references," said Dinesh Shukla, senior banking analyst at Sharekhan brokerage.

Bankers expect the number of new cases referred to the CDR cell to fall in the coming quarters.
There was just a 5 per cent sequential rise in debt recast cases in the JanuaryMarch quarter, compared with 12.40 per cent growth during the OctoberDecember period last year, data from the CDR cell show.

"Bank credit quality will start improving from the October-December quarter with an expected economic revival. During the April-June quarter, the gap between net interest income of public and private sector banks is likely to narrow," Shukla said.

The net interest income may grow about 15 per cent YoY for private sector banks and about 13 per cent for state-owned lenders in the April-June quarter, according to Sharekhan's analysis. The gap was as wide as 13-15 per cent two quarters earlier.

The change of government in New Delhi, with the ruling party having an absolute majority , has boosted the confidence of investors as they expect the new government to implement business-friendly policies to stimulate the economy after two straight years of sub-5 per cent growth. A turnaround in the economy and higher investment will help increase loan demand which had dried up in recent years, hurting lenders. The Union Budget on July 10 is expected to detail the government's economic agenda.

"Asset quality is unlikely to give any positive surprise in the first quarter," said Kajal Gandhi, assistant VP of research at ICICI Securities. "Bank provisions against bad loans can be slightly lower sequentially . This should drive bank profitability along with other income."

In the first quarter of this year, banks off-loaded Rs 30,000 crore of outstanding loans that were classified as stressed assets.

Arcil, the country's largest ARC, estimates that banks will sell close to `. 1 lakh crore of bad loans this year. Last year, they had sold nearly . 50,000 crore outstanding bad ` loans, the highest amount in a year so far. During the three-month period ended on June 30, the BSE Bankex comprising banking stocks jumped 21.35 per cent, outperforming the broader BSE Sensex that rose 13.22 per cent.

"We expect private sector banks to report growth in pre-provision operating profit in line with their loan growth," a Barclays note said.

Their profit before tax, excluding treasury income, is expected to be strong as credit costs are likely to be lower, it said, adding that it expects the growth in pre-provision operating profit to be healthy for public sector banks because of a moderation in operating cost expansion.