1. Disruptions after note curbs likely to add to asset stress

Disruptions after note curbs likely to add to asset stress

NPL additions at private and PSU banks converged in 2Q to 1.5% of loans, as private corporate lenders witnessed a sharp rise in NPLs.

By: | Published: November 16, 2016 6:10 AM

NPL additions at private and PSU banks converged in 2Q to 1.5% of loans, as private corporate lenders witnessed a sharp rise in NPLs. PSU Banks witnessed significant divergence as while Bank of Baroda, Bank of India witnessed a drop, slippages rose sequentially at State Bank of India. Total recognised stress at PSU Banks increased to 15% (11% NPLs, 4% restr), even though large corporate slippage declined as SME stress intensified (mid corp & SME contributed up to ~80% of slippages). 2Q profits of private banks were down 7% y-o-y and PSUs 50% y-o-y, despite banks booking large treasury gains. PSU pre-provision profits were also down 7% y-o-y (+7% at private).

Demonetisation to boost deposits, drive down rates: Banks are set to witness a major boost to their deposit base with 86% of currency in circulation being demonetised. We estimate this can boost bank deposit base by 5-10%. This surge in bank liquidity will further push down domestic rates and trigger sharp deposit rate cuts. This will benefit banks ( & NBFCs) with high deposit costs, and not just the high CASA banks. Mid corp & SME stress could rise: Disruptions post the demonetization is likely to add to the asset quality stress for the financial system, particularly for lenders exposed to real estate and SME segments.

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