Non-bank companies set to record muted financial performance in Q1

Financial performance during the first quarter of FY20 is likely to be muted for most non-banks due to weak loan growth and stable to compressed net interest margins, even as asset quality fared well, according to Kotak Institutional Equities Research. The brokerage noted that the ongoing slowdown in auto sales, weakness in rural cash flows and delay in government spending led to a muted performance in vehicle finance. And, while retail home loan sales were likely stable, the slowdown affected overall loan growth for housing finance companies.

Their asset quality performance was likely to be strong in line with previous quarters, but a rise in bad loans within the wholesale lending segment, especially developer loans, remains a major overhang. “We expect non-banks to remain a bit cautious on liquidity and growth over the next few months, management commentary in this regard will be crucial,” Kotak noted.

However, the brokerage maintained a positive outlook on corporate banks (ICICI Bank and SBI) given their inexpensive valuations and visibility of steady progress towards return on equity normalisation in FY20-21. While Yes Bank would have the most challenging quarter, the focus is likely to be equally on the asset quality of IndusInd Bank and RBL Bank. On the other hand, the slowdown in revenue growth (loan and non-interest income) for banks like HDFC Bank will dominate the discussion for the quarter, while there aren’t many red flags for Federal Bank and small finance banks like Equitas, AU and Ujjivan, which are steadily improving in core performance.

Meanwhile, early warning indicators reported by the RBI in its financial stability report reaffirms hypotheses that the pending stress to be recognised by banks is not too high. “We expect gross and net NPLs to show further improvement as we see slippages declining further. Resolution through the IBC framework has slowed as several high profile cases could not reach a conclusion as anticipated earlier. However, progress continues outside through settlements/upgradation/write-offs, etc.,” it said.

According to the report, banks will likely turn in a stable operating performance with a recovery in earnings trajectory though there are a few one-offs like the merged financials of BoB (with Dena and Vijaya) and IndusInd Bank (with Bharat Financial). Moreover, the base quarter had a one-off net interest income (Bhushan Steel), and treasury income support would be higher given the interest rate movement.

Loan growth slows down in first quarter

According to Kotak, loan growth has slowed to 12 per cent over the last year, which would put pressure on revenue growth. It also expects decelerating trends to be more visible in retail-oriented loan books like HDFC Bank and IndusInd Bank