Listed Commercial Banks Could Post 5.5% Increase in Third Quarter Net Profit

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Still in the shadow of the Covid-19 pandemic, listed commercial banks could record a 5.5% increase (year-on-year or year-on-year) in their net profit for the third quarter ended December 2020 (Q3 of FY21).

Their net income could increase by around 1.8% during the review period, according to Bloomberg estimates.

Estimates indicate that private sector lenders will perform better than public sector banks (PSBs). Many PSBs are still busy managing the merger process which began on April 1, 2020. Sharp interest rate cuts, restructurings and the challenges of deploying huge excess cash will impact performance. The magnitude of the rejig was lower than previous estimates, relieving banks in part of the burden of the provision and increased bad debts, the bankers said.

According to ICRA, the volume of loan restructuring is expected to be less than 2.5 to 4.5 percent of advances compared to initial estimates of 5 to 8 percent. The pressure on the quality of banks’ assets could ease, with net non-performing assets (net NPAs) expected to fall to 2.5% by March 2022, against 3.1% estimated for March 2021.

A senior banker pointed out that asset quality figures are currently being masked due to the Supreme Court verdict, which temporarily barred recognition of certain slippages as NPA after the moratorium period ended.

The activity (credit drawdown) is clearly better sequentially (over the second quarter). But the effect of the economic disruption caused by the pandemic is enormous.

This quarter (Q3 of FY21) coincided with the end of year holidays, giving a boost to personal credit. In addition, credit to micro, small and medium enterprises (MSMEs) has benefited from government guaranteed programs. Still, activity remains sluggish compared to credit growth last year. Bank lending rose 6.1% (year-on-year) through December 18, 2020. This is less than 7.1% a year ago, according to data from the Reserve Bank of India.

National brokerage firm Motilal Oswal, in an overview of third quarter performance, said higher credit costs, coupled with suppressed credit growth, are expected to put pressure on short-term profits for private lenders. Edelweiss said that with a near consensus among banks to err on the side of caution in deploying restructuring benefits, the third quarter of FY21 marks the end of the apparent calm of the Covid-19 crisis.

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