By Jyotivardhan Jaipuria
Private banks have relatively underperformed the public sector banks (PSBs) over the last couple of years, with the Nifty Private Bank index underperforming the Nifty PSU Bank index by 141.8%/70.4% over two-/one-year periods, respectively. Private sector names have registered even dismal performance considering the fact that PSBs delivered a staggering 175.7% over the last couple of years. The race for deposit mobilisation given stretched LDRs, some signs of weakening in retail asset quality and the RBI’s stern actions on some lenders on account of regulatory glitches have had a bearing on the performance of banks over the last one year.
The last year or so has been challenging from the standpoint of liabilities mobilisation, with banks paying elevated levels of rates for deposits. Stretched loan/deposit ratios (LDRs) didn’t help, and HDFC Bank’s merger with HDFC Ltd meant that the overall demand for deposits was further elevated to meet regulatory requirements of the combined entity. The need to raise deposits at elevated levels and its likely impact on NIMs had weighed as a concern for the sector.
Banks have reported impressive deposit growth numbers over the last quarter —most have registered deposit growth in excess of advances growth, thereby raising their liquidity coverage ratios to respectable levels. Liquidity conditions tend to be more benign in the first half of the financial year and cuts in rate by the RBI (if any) should help ease the tight liquidity environment in the second half. Overall, the impact on margins could be limited from hereon.
The asset quality continues to hold well, with most banks registering a fall in GNPLs and NNPLs declining from March FY23 levels. Overall asset quality has been resilient, but banks have indeed benefited from recoveries and writebacks of stressed assets from COVID, keeping their credit costs under check. Certain segments in retail (largely unsecured) have witnessed early signs of deterioration and could led to some rise in credit costs. Corporate credit quality is holding good — overall credit costs for banks could have bottomed, but no significant rise is expected.
The recent RBI draft guidelines on provisioning for loans to projects under implementation is the joker in the pack. With a 5% provisioning in first year of disbursements, banks could shy away from incrementally lending to this segment or accordingly change the pricing of loans. While banks are still in the process of assessing the overall impact of these guidelines, in the current form they look onerous, primarily for PSBs, given their large exposure to these projects. Expect banks to make representation to the regulator on the same over coming weeks.
Most banks will likely witness improving cost/income outcomes as operating leverage plays out. Fee growth will remain steady and with credit costs not rising materially, banks should be in a position to generate RoAs/RoEs at March 2023 levels across the cycle (through FY26). In this backdrop, valuations of banks, especially in the private sector, have corrected meaningfully, making the risk/reward extremely favourable.
(The author is founder & MD, Valentis Advisors Pvt Ltd. Views expressed are personal)