It is not unknown that private sector banks—with better earnings visibility and a somewhat more resilient show—have been the darlings of the market in the recent past. In the last one year, while the stock prices of PSU banks have fallen sharply, a few private sector banks have continued their strong run. With too much money chasing too few stocks, valuations of some of the private bank stocks are at historical levels.

But interestingly, the fundamental performance of private sector banks does not mirror the market’s exuberance. For one, over the past four quarters, the core net interest income of private sector banks, has been moderating. Slowing loan growth in some of the larger banks, pressure on margins and sudden shocks on the asset quality front have impacted banks’ core income from lending. Two, bad loans have been creeping up too, leading to higher provisioning, impacting earnings. Three, the rise in government bond yields have led to treasury losses, eating into their core income. All of this has led to profit shrinking on a yearly basis for two consecutive quarters for the entire pack.

Core income moderates

While private banks have managed to grow their loan book through market share gains (as their PSU counterparts consolidate balance sheet), strong retail and SME focus and healthy capital base, the growth in core interest income has slipped. From 16 per cent levels in the June quarter last year, growth in net interest income slowed to 12 per cent in the March quarter. While growth has managed to inch up to 14 per cent in the June quarter, a low base and some one-off recoveries in few banks has helped. Sustainability of the trend needs to be seen.

For HDFC Bank , despite the healthy traction in loans, the growth in the bank’s net interest income has slowed in the last two quarters. From 24 per cent YoY growth in the December 2017 quarter, net interest income grew by a slower 17.7 per cent in the March 2018 quarter and by 15.4 per cent in the latest June quarter. For IndusInd , growth has slowed from 31 per cent levels in June quarter of last year to 20 per cent in the June 2018 quarter. From a robust 30-40 per cent growth last year, net interest income growth moderated to 23 per cent in the latest June quarter for YES Bank .

A consistent moderation in growth, not priced into valuations can weigh on stock prices, if markets turn volatile.

Big daddy banks under pressure

Axis Bank and ICICI Bank —two large private sector banks—have weighed heavily on the performance of the entire pack. Core income growth for these banks has in any case been tepid—at flat to low single-digits. Axis Bank’s net interest income growth that inched up to 12 per cent in the June quarter, has been aided by a one-time impact of interest realisation from recovery on an IBC account.

On the asset quality front, after the one-time hit in the March quarter, on account of the RBI’s diktat on stressed assets, slippages still remain elevated for both Axis and ICICI Bank. For Axis Bank, addition to its stressed assets pool remains a concern. For the rest of the private bank universe too, bad loans have been on the rise over the past four quarters.

YES Bank reported sharp divergences in the September 2017 quarter. There has also been a notable rise in gross slippages in the latest June quarter. IndusInd Bank, had reported bad loan divergences pertaining to 2016-17, in the March quarter.

HDFC Bank too has been reporting additions (though modest when compared to peers) to its bad loan book. While the GNPAs for the bank, in absolute terms, has gone up by 30-40 per cent YoY over the past few quarters, a healthy growth in loans has kept delinquency ratio at bay.

Hence, the divergence report for FY18 will be a key factor to watch for, to assess the big picture on asset quality for private sector banks.

Overall the profit growth for private sector banks fell sharply from 23 per cent in March 2017 quarter to single digits in the December 2017 quarter. In the March and latest June 2018 quarter, profit has shrunk by 37 per cent and 16 per cent respectively for the entire private bank universe. Axis Bank, ICICI Bank, South Indian Bank, Karur Vysya Bank—all recorded a steep fall in profit in the latest June quarter.

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