Bad Loans to Mar Bank Earnings; SBI may Buck Trend

Public sector banks will lag behind the private ones in their June quarter earnings as they will be plagued by rising bad loans to state electricity distributors, textile and steel industries. But the net profit of the nation's biggest, State Bank of India, will more than double year on year due to low profit last year. 
The top six banks and the biggest mortgage lender, Housing Development Finance Corporation, may report an average 48% increase in net profit, skewed by a 145% jump in SBI's net profit, a survey of five brokerage estimates by ET shows. HDFC Bank, the first of the major banks to report the June quarter results on Friday, may say its quarterly earnings rose 28%, a bit lower than its customary 30%, as demand for funds and customers may have lowered profitability. Net interest income, the difference between the interest paid for funds and income earned from lending, may rise 20%, the forecast shows. 
"Private banks are likely to report a stable quarter," Siddharth Teli at Religare Capital Markets wrote in his forecast for the quarter. "Restructuring is likely to decline for public sector banks as a bulk of Air India's and state electricity boards' restructuring is already in the base. However, the outlook for asset quality remains challenging and corporate debt restructuring proposals continue to increase." 
The economic slowdown has split the state-run and private sector banks in terms of performance as the project lending-focussed public sector lenders struggle to recover their loans since many of the projects are stalled. Consumer-focussed private sector banks are still reaping the benefits of cherry-picking with their customers meeting payments. 
Corporate debt restructuring, a euphemism for liberal repayment terms for those who are about to default on payments, is set to climb to . 2 lakh crore this year from . 1.5 lakh crore last fiscal, rating company Crisil said. Visa Steel, Duplex Industries, Parenteral Drugs, NaftoGaz, Bodal Chemicals, Vijayaa Steel, and Konaseema Gas Power are among the companies that are being bailed out. 
SBI may remain an exception, with a net profit growth of 145% due to low base last year. In the June quarter of 2011, its profits more than halved to . 1,582 crore due to bad loans provisioning. 
Even if banks come up with decent earnings growth in the quarter, a slowing economy could take a toll on banks' profitability in the next few quarters as companies struggle to make payments. Loans are growing at 17.8% compared with 20.7% a year earlier. But deposits are slowing to 14.3%, from 18.3%, which is compressing profitability. 
"Given the current tough macro environment, asset quality stress is a corollary," says Nilesh Parikh at Edelweiss Securities. "Slippages for public sector banks will remain high for the next one to two quarters while we expect private players to fare well." 
shilpy.sinha@timesgroup.com