Banks are likely to witness higher provisions and sluggish earnings growth after the government on Friday announced a slew of measures to deal with the bad loan problem, warn brokerages.
It is unlikely that non-performing loans will get cleared at a fast pace unless banks get a large amount of capital, analysts at Morgan Stanley wrote in a note to clients. The brokerage house prefers retail lenders to banks focused on corporates.
We expect corporate lenders to struggle with earnings and profitability. In our view, these banks will continue to gain market share at an aggressive pace thereby compounding earnings.Morgan Stanley Report On NPA Policy
Jefferies expects the government to remove the roadblocks and work on the legal framework by introducing newer laws. The brokerage firm warned that such steps might be time-consuming, and that provision costs will remain elevated as haircuts get priced in.
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Earnings for corporate lenders are expected to be volatile and possibly weak. Pure retail financing and home loan segment offers the best earnings visibility, in our view.Jefferies Report On NPA Policy
Motilal Oswal said that while the measures were positive, it is unlikely to result in quick resolutions. There could be delays in setting up the committees considering the complexity. However, the firm is bullish on ICICI Bank Ltd., State Bank of India, Punjab National Bank and Bank of Baroda.
Most negatives are priced in terms of low credit growth, margin pressure, lower trading gains and issues on capitalisation.Motilal Oswal Report On NPA Policy
IDFC Securities too said that the resolution process will remain long-drawn. The domestic brokerage added that the Ordinance “isn't a game changer”.
We do not see upgrades to earnings following the Ordinance because ageing cost for FY19 would be higher than consensus estimates if status quo continued. It's only that the street will not have to downgrade earnings which they would have to do, had it not been for the Ordinance.IDFC Securities Report On NPA Policy
Bank of America Merrill Lynch in its note argues that, the government can achieve higher growth at the same fiscal deficit if it recapitalizes banks to enable higher loan growth to fund recovery.
The real source of rising bank NPLs are high lending rates when we are living through a global recession that may be longer than the Great Depression. After all, the bulk of NPLs are cyclical.Bank of America Merrill Lynch Report
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