PNB fraud, SBI result: Why good earning season may not boost Indian stocks

An otherwise strong earnings season for India’s companies is proving just not good enough for some, after a surprise loss by the country’s biggest bank renewed worries over credit quality.

State Bank of India’s December-quarter results spurred Motilal Oswal Securities Ltd. to pare its earnings per share estimate for NSE Nifty 50 Index firms by 3 per cent for the current fiscal and by 0.6 per cent for the financial year starting April 1.

“After beginning on a strong note, the season lost its sheen toward the end,” analysts led by Gautam Duggad wrote in a note. “The miss at profit after tax level can be entirely ascribed to public sector banks,” with the increase in provisions for bad debts and a drop in treasury income amid hardening bond yields dragging the bottom line, they said.

Sales at Nifty companies climbed an average 13 per cent and profits rose 7 per cent in the period from a year earlier, trailing the brokerage’s forecasts for both those metrics. Net income growth more than doubled to about 17 per cent after excluding SBI’s earnings, the analysts wrote. Tata Motors Ltd. and Oil & Natural Gas Corp. were also among heavyweights to announce sub-par results toward the end of the season, the brokerage said.

While businesses have recovered from the disruptions caused by the cash ban in late 2016 and the new sales tax implemented in July, the uncertainty about credit losses at state-run lenders continues to pose risks to a strengthening earnings picture, Duggad wrote.

The $2 billion fraud at Punjab National Bank that came to light last week has already stoked fears of it impacting other government-owned banks.

State Bank of India