Move to new tax regime in Q2 may dent SBI, BoB earnings: Emkay

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SME Times News Bureau | 09 Oct, 2019
The State Bank of India and Bank of Baroda may report healthy pre-provision operating profit, but elevated credit costs and higher mark-down on DTA or Deferred Tax Assets could impact their earnings if they decide to move to the new tax regime in Q2.

It will be a Soft and volatile quarter for banks, the brokerage said adding: "We expect banks to report reasonable PPoP (Pre-provision operating profit) growth (23 per cent yoy for Pvt Banks/17 per cent yoy for PSBs), driven by nearly stable margins and healthy treasury gains. However, LLP (Loan Loss Provision) is likely to remain elevated due to higher NPAs/write-offs and banks' strategy to improve PCR (provision Coverage Ratio).

"Banks are divided on migrating to the new tax regime in Q2 as they are assessing the impact of the withdrawal of tax deductions/exemptions, mark-down of DTA (deferred tax assets).The brokerage said main private sector banks may shift to the new tax regime.

"We believe that some frontline private banks, such as ICICI, Axis, HDFCB and IIB, may move to the new tax regime, but in the process they will have to mark down the DTA, impacting their earnings. Thus, among private banks, we expect HDFCB, ICICI, Kotak, Federal Bank, CUB, Bandhan and SFBs (Equitas, Ujjivan, AU SFB) to report healthy performance at the operating level, but some may see volatility at the net earnings level due to the DTA impact.

"Among PSBs, we expect BOB and SBI to report healthy PPoP, but elevated credit costs and higher mark-down on DTA could impact their earnings if they decide to move to the new tax regime in Q2.

"The report added headline NPA ratios may moderate a bit but concerns remain around lumpy fresh corporate stress and continued slow pace of resolutions," Emkay said

"Overall, we expect moderate agri-stress vs. Q1 due to good monsoons and moderate corporate slippages on a possible bunching up of corporate NPAs in H2 to lead to lower headline NPA ratios (7.1 per cent vs. 7.3 per cent in Q1).

"Within the corporate book, the key large stressed loans include DHFL, Essel Group, Sintex Industries, Mcleod Russel, Eveready Inds, Suzlon, Cox & Kings and some real-estate developers.

"However, we expect some of these stressed loans to be recognized in Q2FY20, while the majority may possibly slip into H2FY20, including DHFL, if not resolved.

"Resolutions via the IBC still remain in the slow lane, while some resolutions outside the NCLT in the power sector (Prayagraj Power, Rattan India, GMR Chattisgarh and KSK Mahanadi) have progressed well but may possibly reflect in H2. We believe that Q3 may see a confluence of lumpy recognitions and resolutions," it said.

Emkay said NBFCs set to report another subdued quarter: HFCs/AFCs continue to struggle amid economic and real estate/auto slowdown, while liquidity remains tight for most HFCs due to continued lending reluctance, which has accentuated due to fraud allegations on a leading player and default by a smaller lender.

"We do not see much of a liquidity challenge for AFCs although demand continues to remain weak. For our NBFC coverage universe, we expect NII (Net Interest Income) growth of about 17.2 per cent yoy, mainly driven by steady growth across AFCs and a high-quality HFC (HDFC). Similarly, we expect PAT to grow at about 10 per cent yoy, mainly on the back of stable NIMs and improving credit costs," it added.