Fourth quarter of FY18 was the worst quarter for Indian corporate lenders, as the PSU banks reported an aggregate loss of Rs 600 billion as another 3.5% of loans (Rs 1.9 trillion) turned into non-performing loans (NPLs) and banks made Rs 1.2 trillion of additional provisions. Operating performance was also depressed for PSUs, with loans and deposits growing only 2% y-o-y. Operating expenditures (opex) rose 20% while pre-provision profits were down 22%. PSU banks saw some pick-up in loan growth this quarter, as gross loans grew 4% q-o-q, with loans from non-prompt corrective action (PCA) PSU banks growing ~5.5% q-o-q. As opex continues to increase and net interest income (NII) growth weakens, opex to NII for all PSU banks has reached >90% in Q4FY18, with opex to NII at >100% for several PSU banks.
Treasury losses were lower in Q4 at Rs 48 billion vs Rs 70 billion in Q3, as banks utilised RBI dispensation and deferred ~Rs40 billion of losses to FY19. With yields up 40bp since March 2018, losses are expected to be large in Q1FY19 as well. Overall losses have increased sharply, as banks increased provisions for NPAs. Credit costs were elevated at ~8% this quarter, resulting in coverage improving ~280 bp q-o-q.
Private banks’ performance was also weaker in Q4, dragged down by Axis and ICICI, adjusting for which, profits grew 21% y-o-y. Profitability at the retail private banks remains strong, with pre-provision profitability improving to 3.5%. Loan growth was also strong at ~26% y-o-y. Private banks continue to gain market share
With PSU banks constrained for capital and ~30% of PSU bank loans with banks under the PCA, private banks have continued to gain market share. They have accounted for ~40% of loans over the past six months and ~60% over the past year. Private banks have also started gaining market share on the deposit side, accounting for ~60% of incremental deposits over the past 6-12 months. Eleven of the 21 PSU banks are currently under the PCA framework. With net NPAs >8% and common equity tier (CET) levels down to <6%, Punjab National Bank (PNB) and Andhra Bank look like candidates to be added to the PCA framework.
If PNB and Andhra were to be added to the PCA framework, share of loans under PCA will likely increase to 26% from 19% currently. PSU banks under PCA have seen loans contract y-o-y, while non-PCA PSU banks have seen a 10%
y-o-y growth in loans. Private banks continue to see strong loan growth (22% y-o-y). With RBI putting sanctions on further loan growth for Dena Bank and Allahabad Bank, loan growth for PCA banks is likely to contract further.
While private banks have gained market share on deposits as well, resulting in loans-to-deposits ratios (LDRs) declining for some of them, they remain high at 90-100%, and could be the constraining factor for further loan growth. Accelerating shift in deposit market share as well
Private banks have accounted for ~60% of deposits over the past 12 months, with deposits growing at ~17% y-o-y vs 5% for the non-PCA PSU banks and -4% for the PCA PSU banks. While PSU banks have been shedding higher cost deposits, given their low LDRs and weak loan growth, private banks have seen stronger growth in their ratio of deposits in current and saving accounts to total deposits (CASA) as well. Savings account (SA) growth at the private banks has outpaced growth seen at the PSU banks.
Sharp spike in slippages
Slippages spiked this quarter, post the February 12 RBI circular that withdrew various dispensations. Nearly Rs 2.2 trillion (~3.3%) of loans slipped in Q4. However, a large share of the slippage was from “known” stress and given continued large write-offs (~0.8% of loans), overall stress declined q-o-q. Banks such United, PNB, and IDBI witnessed the steepest rise in slippages, with nearly 7% of loans turning into NPAs. Even at other PSUs, 3-5% of loans turned into NPAs. Among the private corporate lenders, Axis saw 4.5% of its loans turn into NPAs, and ICICI 3%.
With high slippages sustaining over several quarters, corporate banks have now already witnessed 20-30% of their FY13 loan book turning NPA in the past five years and 15-20% in the past three years. On a gross of recoveries basis, slippage was even higher, at 20-30%, over the past three years and 30-40% over the past five years.
Given a large share of slippage came from “known” stress and ~Rs 500 billion of write-offs in Q4, overall impaired loans have declined q-o-q. Gross NPAs have now increased to 11.5% for the system and 14.5% for PSU banks. Residual stress is now down to >3% of loans, and with recoveries from List 1 under IBC coming in, NPA levels have likely peaked. PSU banks continue to write off a large share of their loans, with ~Rs 1.2 trillion (2.3% of loans) written off in FY 18 and Rs 500 billion in Q4. Aggregating the write-offs over the past five years, corporate banks have 15-30% of loans recognised as NPAs.
Planned capital infusion will not suffice
The government infused ~Rs 800 billion of capital into PSU banks in Q4, resulting in CET-1 improving for most banks. However, given the large losses, CET-1 levels for many are still below the Basel III thresholds. Also, banks have recalled their AT-1 bonds (some recalled their bonds post March 2018), resulting in Tier-1 ratio declining q-o-q. In order to reach Basel III Tier-1 requirement of 9.5% by FY19, these banks will need to raise further equity capital of raise AT-1 bonds.
Over the past three years, the government has infused Rs 1.4 trillion of capital in the PSU banks.
A large (Rs 810 billion) share of this has been to PCA banks (`60% of capital, with 27% of loans) that have incurred Rs 820 billion of losses in this period. It has infused ~Rs 590 billion in the non-PCA banks, which have had losses of Rs 310 billion over the same period. With core operating profitability remaining weak, as pre-provision operating profits to assets ratio remains low at ~1% for most PSU banks, even as credit costs normalise, they would require capital to fund growth.
With provision cover still at ~41% on their 14.5% NPLs and 3.3% residual stress, we estimate PSU banks still need an additional Rs 1.9 trillion of provisions (post tax). Even assuming no loan growth at PCA banks, the Rs 650 billion of budgeted recap will likely be needed just for these banks to reach a 65% provision cover and maintain CET-1 at 8%. If the planned recap is doubled to Rs 1.3 trillion, it can support a 6% loan growth at the non-PCA PSU banks.
The Writer is Managing director and head, India Equity Research
Views are personal
Co-authored by Kush Shah, research analyst, India Equity Research
Edited excerpts from Credit Suisse’s Asia Pacific/India Equity Research’s India Financials Sector (review) report, May 30, 2018