Is the worst over for banks or is there more pain in store?

A challenging environment and lingering stress on the loan book continue to cloud the sentiment for banking stocks

Published 8 years ago on Apr 13, 2016 2 minutes Read

Vinay Khattar, Head of research, Edelweiss Financial Services

We are through most of the pain in the system. The thing to watch out for though will be the government’s recapitalisation plan: will it use RBI’s balance sheet or will RBI further tweak capital recognition norms, like it did recently? In the process, physical property owned by banks had been considered as tier I capital, and an infusion of Rs.35,000 crore was affected. But we are definitely seeing some green shoots in the economy: the infrastructure sector is beginning to do well and orders are being handed over in roads and rails. This is translating into some traction in the order books of large companies. If the consumption side starts to benefit from government initiatives and the 7th Pay Commission, capacity utilisation levels will pick up and the second leg of economy, led by consumption and industrials, will be back in action. This will have a positive impact on the banking sector, as the stress on bad loans will start easing.

AK Prabhakar, Head of research, IDBI Capital

Going ahead, we are likely to see more loan accounts turning bad. Many banks have said that this quarter is going to be bad for them on account of the central bank’s asset quality review (AQR). We expect Q4FY16 to be much worse than the projections made after RBI’s first AQR in Q3. As per reports, ICICI Bank is expecting its March quarter provisioning number to be similar to the previous quarter (Rs.2,844 crore). But there are fresh worries that might impact the market negatively. Stressed corporate groups are finding it difficult to sell assets due to poor market conditions. So, the pain will continue to reflect on banks’ balance sheets. Corporates will be unable to meet their commitments towards selling their assets and settling their liabilities with the banks, resulting in fresh slippages. Meanwhile, steel and power sectors continue to remain a source of concern for banks, and, for now, the outlook for these sectors is far from rosy.