Religare Institutional Research expects healthy earnings growth of 16.8% YoY for private banks driven by stable NIMs, but partly offset by elevated credit costs and moderating fee income.
Margins should remain stable for ICICI Bank and HDFC Bank, but witness a marginal decline for Axis Bank. Slippages are likely to remain largely at Q3FY14 levels, while incremental restructuring would be higher sequentially. Fee income too would remain under pressure, further impacting earnings, it said.
While earnings growth may decline for PSU banks to 17.4% YoY, we expect PPOP to increase by 4.3% YoY mainly on stable margins. We believe fresh GNPA formation in Q4FY14 should moderate slightly due to increasing sale of bad loans to ARCs; however, we expect slippages and restructuring to remain at elevated levels. Provisions too may remain high due to aging of NPLs, higher restructuring and pending treasury losses.
"During Q4, business growth is likely to moderate for most NBFCs under our coverage. However, recoveries are likely to improve, in line with the seasonal trend, thus leading to lower provisions and improved NIMs. NIMs may improve QoQ, a trend typically seen for HFCs in Q4, while disbursements may pick-up for gold NBFCs on easing of regulations," Religare added,
"We expect a subdued Q4FY14 for our banking universe with earnings declining by 2.2% YoY, largely led by moderating fee income and higher credit costs," it opined.
Stable NIMs amid better liquidity conditions and some gains from the equity portfolio would provide support. It believes fresh slippages have started to stabilize, but would remain at elevated levels, the broking firm said.
While elevated interest rates may continue to impact asset quality in the near term, we believe slippages may have likely peaked out and the stress is likely to abate in FY16 led by a pick-up in GDP, lower inflationary pressures, softening interest rates and improving corporate profitability.
"We maintain our bullish stance on the sector and prefer well-capitalized banks that are better placed as the recovery cycle kicks in. We like ICICI Bank, HDFC Bank, SBI and Bank of Baroda among banks, and Shriram Transport Finance, Power Finance Corporation and Rural Electrification Corporation among NBFCs," Religare said.
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