1. Bank NPAs crisis: Bad loans moderating, but credit costs are rising

Bank NPAs crisis: Bad loans moderating, but credit costs are rising

Most banks witnessed a sharp sequential drop in gross slippages. Moderation in slippage was visible in the SME and agriculture segments as well, after the Q1 increase (partly on account of farm loan waivers).

Published: November 18, 2017 4:45 AM
The good news is that loan slippages are moderating, though credit costs are rising due to the burden of provisioning. And private banks continue to gain market share.

After many quarters, the aggregate gross non-performing asset (NPA) levels were held stable in Q2, at 10.3% of loans, aided by banks writing off 0.5% of loans (Rs 330 billion) during the quarter and net slippages moderating to 0.7% (from 1.3% in Q1). While gross NPAs are at around 10% of loans, non-NPA stress remains high and accounts for another 5-7% of loans across banks. Slippages are likely to come largely from these buckets; as we saw in Q2, 30-70% of the slippage was from the watch list and restructured book. Axis Bank saw higher slippage outside of known stress on account of the Reserve Bank of India (RBI) audit. Q2 witnessed a sharp divergence in slippages, which moderated at public sector banks (PSBs) from the elevated levels seen in the last couple of quarters. However, private corporate banks have seen an increase in slippages, led by Axis Bank and YES Bank, which were impacted by the RBI audit. The RBI audit is yet to be completed at a few PSBs (SBI, Bank of India) and ICICI Bank, and this may impact their Q3 numbers.

Most banks witnessed a sharp sequential drop in gross slippages. Moderation in slippage was visible in the SME and agriculture segments as well, after the Q1 increase (partly on account of farm loan waivers). Corporate slippage was down at most banks. Corporate banks appear to have accelerated write-offs in H1 (around 100bps of loans) as they wrote off another Rs 330 billion of loans in Q2. PSBs wrote off around Rs 2.8 trillion of loans (5.8% of loans, or around 60% of current PSB capital) over the past four years. Without this, NPAs will be 20-50% higher than the reported NPAs of 8-25%. Axis Bank and ICICI Bank have also written off Rs 50 billion (60bps of loans) in Q2 and Rs 335 billion (4.7% of loans) over the past four years. This high delinquency experience would necessitate high standard asset provisioning, whenever these banks migrate to International Financial Reporting Standards (IFRS).

As a result, credit costs were up at 3.9% of loans on account of provisions on Insolvency and Bankruptcy Code (IBC) cases and ageing. NPA coverage, therefore, improved 300bps quarter-on-quarter to 46%. With most banks still to provide for the second list, credit costs are likely to remain high in H2. The overall stress asset cover remains low at around 33%. Q2 saw some pick-up in PSB loan growth, with many mid-sized PSBs (Punjab National Bank, Union Bank, Canara Bank, Indian Bank) growing loans 4-8% quarter-on-quarter. SBI, though, grew only 1% quarter-on-quarter. Therefore, while market share gains for private banks continue, it has slowed to 60% of incremental loans versus around 80% over the past 12 months. Their overall loan growth, though, continued to be healthy at about 20% year-on-year. In terms of deposits as well, private banks continue to gain market share, while this has been at a slower pace as compared to loans.

Aggregate gross loan growth for PSBs was muted, at 1% quarter-on-quarter; some PSBs saw a pick-up in loan growth, growing 6-8% quarter-on-quarter. However, loan growth for banks under RBI’s prompt corrective action plan was relatively weak, most of which continue to witness a contraction, barring the Central Bank, in which loans grew at 7% quarter-on-quarter. As private banks’ loan growth has remained strong and continued to outpace deposits growth, their loan-to-deposit ratios have almost peaked at 85-95% versus 55-75% for PSBs, and hence we are unlikely to see them follow PSBs’ recent rate cuts on term deposits. On the back of the 50bps cut in savings deposits at most banks, they have witnessed a further 10-15bps drop in deposit costs. As loan growth saw a slight pick-up and banks continue to report losses on the back of higher provisions, capital consumption was higher this quarter, at 30-70bps across banks, further accentuating the need for PSB recap.

Thirteen of the 21 banks, with loans of Rs 20 trillion (around 40% of PSB loans, and 60% excluding SBI), are with banks having common equity tier-1 (CET-1) of less than 7.5%. All the seven banks under RBI’s prompt corrective action also have CET-1 of less than 7.5% and these account for 17% of PSB loans. With Axis Bank recently raising Rs 120 billion of capital and SBI expected to be a key recipient (our estimate is Rs 420 billion) of the government’s PSB recap plans, their CET-1 levels will move up to 12.5-13.5%. ICICI Bank’s capital levels are already healthy, at around 14%. With these capital raisings, we believe these banks would now be in a position to improve coverage.

Stressed asset cover is still low

NPA cover for SBI/Axis/ICICI of them is still relatively low at 47-49%. On the total stressed loans, coverage is even lower at 28-34%. As 2-4% of their loans are likely to be in the National Company Law Tribunal (NCLT) by the year-end, they will need to raise provisions on these loans. Provisioning needs for these are relatively higher at ICICI Bank (`25 billion, 0.5% of loans) compared to Axis Bank (0.1% of loans) and SBI (0.3% of loans). Many of the strategic debt restructuring (SDR) cases will also be nearing the end of their 18-month standstill in H2FY18, which are 0.5-0.6% of loans for these banks.

Among the three corporate lenders, SBI has the highest exposure to NCLT cases as a share of its loans (4.2%). If all cases in the two lists are resolved, the gross NPA ratios of SBI and ICICI Bank could come down by 4 and 3.5 percentage points, respectively. Axis Bank is also now relatively better covered on provisions on IBC cases. It needs very little additional provisioning to meet RBI’s thresholds, while ICICI Bank and SBI need another 0.3-0.5% of loans.

Ashish Gupta, Kush Shah & Anurag Mantry
Ashish Gupta is MD, Kush Shah is research analyst and Anurag Mantry is research associate, Equity Research, Credit Suisse.
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