Financial sectors' earnings are poised to recover: Motilal Oswal

According to the report, retail disbursements are showing healthy recovery with certain segments reaching pre-Covid levels or even higher. On the other hand, banks remain cautious on the unsecured book. 

As per the report, commercial vehicles (CV) and corporate loan demand remains tepid. 

Overall, the report estimated business growth to pick up, aided by a good festive season, and expect systemic loan growth at 4.5 per cent for FY21E. 

"We remain watchful of asset quality as banks recognize Non-Performing Loans (NPLs) from moratorium or overdue loans. Although, overall trends have fared better than earlier expected, led by sharp improvement in collection efficiency." 

Accordingly, large banks reported collection efficiency of 95 to 97 per cent while mid-sized banks or Micro Finance Institution (MFI)-focused players reported efficiency in the early 90 per cent resulting in low restructuring guidance by lenders. 

"We believe although slippages are likely to increase in 2HFY21, many banks have already provided for this likely increase and carry additional provision buffers -- which should limit the impact on profitability." 

"We expect banks to continue to strengthen their balance sheets -- as they have already shored up their capital ratios to absorb asset quality shocks -- and estimate credit cost to remain elevated." 

In terms of private banks, the report said provisioning would continue to weigh on earnings. 

The report cited higher credit cost, coupled with suppressed credit growth, is likely to put pressure on near-term earnings. 

Furthermore, higher slippages would result in interest reversals, putting pressure on Net Interest Income (NII), it said. 

"However, this may be partly offset by higher treasury income and traction in fee income as business activity picks up." 

In addition, Public Sector Banks' (PSBs) earnings would remain under pressure, the report added. 

"We estimate weakness to continue in PSBs barring SBIN, impacted by sluggish loan growth, a higher proportion of MSME or SME loans, and delay in the resolution of stressed accounts." 

"PSBs are expected to deliver NII growth of 2.8 per cent YoY and PAT growth of 18 per cent YoY. However, treasury gains for these banks may remain positive."