India Ratings’ analysis also suggests slippages for FY21 would be around 5% for these banks, as against 2.3% in FY19 and 2.7% in FY20 (net slippages would be lower), if refinancing remains a challenge.
The pre-provisioning operating profit (PPOP) of the top five private banks by size of advances, constituting 25% of overall banking and 75% of the private bank space, could decline by up to 15% Y-o-Y) in FY21, India Ratings and Research said in a report on Friday. This would decrease the ability of banks to withstand credit costs without capital erosion.
The decline in the PPOP would be an outcome of lower portfolio yields due to an increase in slippages, lower loan growth due to slow originations and limited enhancements, lower fee and other income as origination and transaction volumes ramp up over FY21, a slower pace of re-pricing for deposits in the MCLR regime than that for advances and higher liquidity deployed in low-earning government securities or under the reverse repo window.
India Ratings believes that the impact of the growth destruction and slowdown in economic activities in the banking sector in the aftermath of Covid-19 won’t be benign. “The sector was putting its house in order after the last six painful years on the corporate side. However, the challenges on the non-corporate side (retail, SME and agri) were already showing up (including in retail) as we entered into the pandemic. The pandemic is likely to aggravate that stress. Ind-Ra also expects that the percentage portfolio under moratorium for these private banks would have increased by May 2020.”
India Ratings’ analysis also suggests slippages for FY21 would be around 5% for these banks, as against 2.3% in FY19 and 2.7% in FY20 (net slippages would be lower), if refinancing remains a challenge. At 5% gross slippages, these banks’ net interest margins (NIMs) could contract by 4%.
The growth in deposits for these top five private banks in FY20 was 18.8% y-o-y, up from 18.5% in FY19, while the loan growth declined to 15% from 19.1%. Additionally, the Reserve Bank of India (RBI) has injected Rs 1.7 lakh crore of liquidity into the system over the last six months through open market operations and secondary market purchases. The banks have largely placed the excess liquidity in low-duration government or top-rated corporate securities, reflecting higher credit risk perception and widening duration spreads.
“Additionally, they have moved a large amount of surplus liquidity into reverse repo where rates have declined by 215 bp in the last one year, yielding 3.35%. With the banks’ cost of funds is between 5% and 6%, this could result in a negative carry,” the report said.
While most banks have reduced deposit rates, the impact on cost of funds would be gradual as the incremental funds are raised at lower rates. The one-year MCLR for these banks has fallen by 10-60 basis points (bps) in the last three months. Many banks have 30-60% of lending linked to MCLR — this impacts NIMs immediately as income falls for the entire portion of advances.
The banks with a higher proportion of low-cost current account savings account deposits (CASA) will be less impacted and vice versa.