Banks reported another weak quarter with earnings declining 26% y-o-y. Impaired loans increased 30 bps q-o-q to 10.4% with gross NPLs up 50 bps q-o-q to 7.5% while restructured loans declined 20 bps q-o-q to 2.9%. Revenue growth is struggling with weak loan growth, NIM pressure and negligible fee income streams. NBFCs delivered a mixed performance with significant rise in NPLs for rural/agri finance companies while operating trends in CV business appear to be very strong. Post the sharp rally in NBFCs, we downgraded 10 NBFCs over the past two months and find limited upside from current levels.
Challenging NII growth, high provision impact earnings
The environment continues to be challenging for Indian banks as 13% y-o-y revenue growth was supported by treasury gains, while NII growth remains sluggish at 5% y-o-y. Public sector banks (except SBI) are impacted more (NII decline of 1% y-o-y) due to slow loan growth (or decline in some cases) and continued interest reversals due to high slippages. Among larger banks, Axis Bank and ICICI Bank reported weaker results on expected lines, while HDFC Bank, Yes Bank and IndusInd Bank continued to report stable performance. Margins for the sector in general are under pressure due to underlying competition, interest rate cuts and income de-recognition due to slippages.
Stressed loans rise 30bps q-o-q; gross NPLs up 50bps
Asset quality metrics continue to turn weaker as banks continue to report high slippages, albeit lower than elevated levels of Q4FY16 (AQR driven). Further, q-o-q decline in loan book results in higher headline ratios. Impaired loans increased 30 bps q-o-q to 10.4% with gross NPLs going up 50 bps q-o-q to 7.5% while restructured loans declined 20 bps q-o-q to 2.9%. Impaired loans of public banks increased 60 bps q-o-q to 13.4% while that of private banks were up 10 bps at 4.3% of loans. Fresh slippages were at 5.4% of loans.
Multiple pressure points in business continue as growth is still not visible
Feedback from most banks on impairment ratios suggests flat performance for FY2017. This is supported by the positive news that the pricing benefit on select commodities like steel, large PPAs announced in the power sector, decline in interest rates and healthy monsoons are giving some relief for banks from an NPL perspective. However, the lack of private CAPEX implies unabated pressure on revenue growth as loan growth would be sluggish and pressure to associate with better borrowers implies NIM could see further downside.
NBFCs: Mixed performance; fully priced in
Operating trends for most NBFCs were better than expected as housing finance growth was moderate (no further slowdown) and collections in the CV finance book were strong, despite the fact that Q1 tends to be weak. However, rural businesses were weak with sharp q-o-q rise in NPLs despite the positive sentiment of normal monsoons. NBFCs reported NIM compression, in line with seasonal trends.
Impaired loans continue to rise as slippages still high
Gross NPL for the banks under coverage increased 6% q-o-q, while the ratio increased 50 bps to 7.5% as the overall loan book declined 4% q-o-q. Fresh impairments, although lower than Q4FY16 levels, were still high at 6% with slippages at 5.4% while fresh restructuring was negligible at 0.3% of loans. Among PSU banks, PNB, BOI, BOB and OBC reported relatively high slippages in the quarter, while SBI clearly stood out as an outperformer. Along expected lines, private sector corporate-focused banks — ICICI Bank and Axis Bank — reported weaker asset quality trends as both of them start seeing slippages from the watch list exposures. HDFC Bank, IndusInd Bank and Yes Bank among private banks reported better performance on fresh impairment ratios — a largely unchanged trend in recent quarters. The commentary from banks like Axis Bank and ICICI Bank was negative for FY2017-18 as they indicated that quite a bit of stress is yet to be reported, especially in the power sector. Public sector banks continue to be the worst impacted, especially by their restructured portfolio, where they are currently witnessing a higher share of slippages. A few banks continued to resort to sale of loans to ARCs at steep discounts. Trends on recovery/upgrade were better than in the previous quarter at 1.5% of loans. This is a positive as the first quarter tends to be tepid for recovery. Overall write-offs were high at ~2.0% of loans. The ability to absorb the full write-off is challenging considering the weak earnings profile of banks.