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In Q1 FY18, a major event was the government passing an ordinance for stressed asset resolution and accordingly the Reserve Bank of India (RBI) has asked banks to refer 12 large accounts comprising 25% of GNPAs (mainly in steel/metal and infrastructure sector) to NCLT (National Company Law Tribunal) for initiating insolvency proceedings.

While this is positive in the long run, it would entail heavy provisioning burden on banks as RBI has asked for 50% provision on secured and 100% provision on exposures referred to NCLT. The impact of NCLT provisions may be seen marginally in Q1 and may largely flow to next few quarters.

We expect NPA accretion to moderate in Q1 FY18E compared to the previous quarter. Slippages from the watchlist provided by banks would remain key monitorable. For our coverage universe, we expect net addition in GNPA at Rs 6,430 crore. Despite moderation in slippages, GNPA ratio is expected to inch up owing to muted growth in advances.

The banking system’s credit growth was muted at around 6% y-o-y as on June 09, 2017, while deposit increased 11% y-o-y. Retail focused private banks are expected to maintain their strong growth trajectory of over 20% y-o-y. SBI is expected to grow in-line with industry at around 6% y-o-y, mainly led by a strong trajectory in its retail portfolio. PSU banks would continue to see single-digit growth of around 5%, while private banks would grow credit at 17.3% y-o-y.

In our coverage, mid-size private banks like Federal Bank, DCB Bank and City Union Bank seem to be not much impacted by accounts referred to NCLT and are thus expected to deliver healthy set of numbers.

Earning of retail-centric large private banks is expected to continue to remain strong. This would be first quarter when SBI would report results as a merged entity and hence numbers may not be fully comparable. We expect SBI to report a loss on a consolidated basis. Overall, we expect our banking coverage universe NII to grow 14.1% year-on-year, while profit after tax (PAT) is expected to de-grow by around 13.7% y-o-y and grow by 47% on a q-o-q basis.

The author is vice-president for research at ICICI Direct

Last modified on Wednesday, 12 July 2017

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