Although slippages were largely muted this quarter, owing to the moratorium which ended in August, NPAs might increase in the second half of this fiscal year. However, banks are believed to ready with large provisions for such an event.
Government-backed guarantee loan scheme (ECLGS) also played a major role in the sequential improvement in the bank credit.
The fiscal second quarter results so far hint that the financial sector is cruising towards a faster-than-expected earnings recovery in India. Most leading private banks have reported collection efficiencies at 95%, in touching distance to the pre-coronavirus levels. Lenders in the microfinance sector and vehicle finance space too have reported collection efficiencies of nearly 90%. This points to a better recovery for a sector that was expected to see collections being marred by the pandemic aided slowdown post the moratorium phase. Bank Nifty has jumped over 1,500 points so far this week.
“Most private banks have indicated collection efficiencies in Sep / Oct at over 95%, and within a few percentage points of pre-COVID levels,” said Credit Suisse in a recent note. To add to this, the corporate stress pool or restructured pipeline has seen marginal increase. On the retail front as well, Credit Suisse said that except for MFIs, collection efficiencies are at levels where banks are comfortable to pursue growth.
Although slippages were largely muted this quarter, owing to the moratorium which ended in August, NPAs might increase in the second half of this fiscal year. “Banks, however, over the past 3 quarters have raised provisioning levels, with NPL cover at 75-85% and buffer provisions on standard assets at 1-2% of loans,” Credit Suisse noted. This gives the financials a buffer zone or safety net if things go awry for them.
Earnings on recovery path
Overall in the second quarter, private banks saw their net profits increase 95% on-year basis while provisions increased 27%. Credit Suisse estimates that advances grew 6.2% in the July-September quarter when compared to the same period last year. Deposits are expected to be up 12.3% in the same time frame. “Private banks also appear to be witnessing faster revival in consumer loan growth, probably aided by market share gains from NBFCs,” the report added. The growth in the retail segment has also been noteworthy. Retail loans grew 2-6% sequentially for most banks.
These banks to outperform
Cholamandalam Finance has an Outperform Rating with a target price of Rs 315 per share, given its superior asset quality track record, lower share of problem loans vs peers and expectation of faster recovery in ROEs to normalised levels. IndusInd Bank too has an Outperform rating with a target price of Rs 700 per share. Apart from these two, HDFC Bank and ICICI Bank have an Outperform rating by Credit Suisse. HDFC Bank is favoured owing to its industry leading position, no legacy asset quality overhang, strong balance sheet. On the other hand ICICI Bank’s accelerated NPL recognition leading to de-risking, better pre-provision profitability and capital buffer against problem loans are the key drivers for the rating.