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.