Banking Sector Research Report By ICICI-Direct

Lenders: Still not out of the woods…

In Q4FY20, the Indian banking system witnessed a significant correction amid fears of emergence of Covid and its impact on business growth and asset quality. With lenders preparing for unforeseen rise in NPA, provisioning remained elevated impacting profitability of many players.

The economic slowdown kept business growth in single digits, which further got accentuated by lockdown amid Covid. Moratorium by the RBI kept asset quality stable though a revival in repayment (post end of moratorium in August) remains uncertain. Proportion of moratorium varied vastly with large private banks at 20-30% book in moratorium while mid-sized banks reported ~35-70% based on composition of book (higher for micro finance, CV, LAP, etc). NBFCs have 50-70% book under moratorium and are trying to manage liquidity as majority did not receive moratorium from banks.

In the current scenario, which is quite different from what one would have envisaged earlier, our outlook on the banking sector remains as under;

 Preservation of capital is top priority followed by recovery while growth has taken a backseat

 Advances growth to remain muted in FY21E (Crisil estimate: 1-2% system credit growth). MSME segment to witness traction as banks are disbursing loans under credit guarantee scheme, while traction in retail segment to remain more stringent due to risk averseness. Gold loans to remain in focus with south based banks and players like Bajaj Finance

 With muted opportunity to lend and higher deposit inflow, deposit rates would remain benign thereby keeping MCLR trending downwards. Higher liquidity, declining interest rate structurally impacts NIM for banks

 Management commentary suggests that not everyone taking moratorium is in trouble but majority conserving cash. However, asset quality assessment is only possible post moratorium is over in August 2020

 Banker commentary suggests decline in moratorium to the extent of 5-10%, in unlocking phase. However, given standstill economic activity during lockdown and increased risk aversion, asset quality pains cannot be ruled out. Bottom 5-10% of moratorium customers remain most vulnerable. Therefore, banks are shoring up capital

 Any relaxation in terms of one-time restructuring will act as a near term breather rather than structural solution; delaying recognition of asset quality pain

 Rural India is expected to recover faster than urban cities post lockdown. Exposure to smaller ticket size loans in rural areas and essential services (for example MFI loans) and home loans in retail space are expected to revive faster

 Gold loans are expected to remain in focus with south-based gold finance NBFCs, small southern banks doing well and players like Bajaj Finance entering the segment

A discussion paper on management control wherein a promoter can be CEO for 10 years and professional management can remain in office for 15 years is seen bringing structural changes in the banking landscape. Immediate impact is seen on Kotak Bank as tenure of 10 years is over and current MD will not get extension once current term is over. SFBs and Bandhan Bank would get impacted in the long run with >5 years left for current MD.

We expect financial performance and thereby stock price of lenders (banks and NBFCs) to remain volatile in near term. However, impact of structural changes would remain to be seen in long run. Any announcement on one time restricting could lead to a bounce in stock prices of financials, though it remains a near term respite.

Therefore, we prefer businesses without balance sheet risk and long term growth potential – life and general insurance and AMCs. With PSBs focussed on integration, prefer large private banks with capacity to raise capital, without diluting book value, along with diversified exposure and healthy deposit base.

In NBFC space, we prefer leaders with capacity to shore up liquidity as well as equity capital. NPA stable due to moratorium; recovery to be watched

On March 27, 2020, RBI permitted all banks/NBFCs to allow a moratorium of three months for payments of all term loan instalments outstanding on March 1, 2020. Keeping in mind the economic slowdown amid Covid-19, RBI further extended moratorium period till August 2020.

Apart from this, to provide further support to borrowers, RBI is mulling a one-time loan restructuring scheme. However, RBI has not yet arrived at a decision on this.
Q4FY20 numbers were characterised by lower slippages on the back of standstill asset classification norms. In terms of recovery, as majority of the recovery is undertaken during the end of the quarter, lockdown during the end of March 2020 stalled the recovery pace. Apart from this, temporary suspension of IBC led to a further slowdown in the recovery space, thus delaying the required breather to major banks.

Lower slippages were offset by a muted recovery pace, which led GNPA to inch up 4.9% QoQ to | 939651 crore. Subsequently, GNPA ratio increased 80 bps QoQ to 9.4%. With provision continuing to remain elevated, NNPA came in a tad lower by 0.6% QoQ to | 324865 crore (Covid related provision not included in calculation of NNPA), with PCR witnessing an improvement. Going ahead, extension of moratorium till August 2020 is expected to keep slippages on the lower end in Q1FY21E though repayment from borrowers post August 2020 will remain a key monitorable with probability of defaults ahead.