Banking stocks: Street step-siding the brewing retail-loan stress

Retail NPA ratios for December quarter at 10-year high for most private banks

There seems to be no let-up in banking stocks for the third session in a row, as the Nifty Bank index scaled to a fresh high of 34,758 points, up 1.4 per cent over the previous close. RBL Bank, IndusInd Bank, and Axis Bank continued their upward trajectory, gaining 3.0-7.5 per cent on Wednesday, and were closer to ‘gapping down’ past year’s losses. Brokerages have revised their earnings target by at least 15 per cent across the board for banks after the Q3FY21 results.

The point that seems to be ignored amid the euphoria is the brewing stress in the retail segment.

ICICI Bank, Axis Bank, and RBL Bank, reporting segment-level data on non-performing assets (NPAs), indicate the stress in the retail segment is at a 10-year high. IDFC First Bank posted 3.88-per cent retail gross NPA without considering the Supreme Court’s (SC’s) stay on asset classification — the highest the bank has ever witnessed.

Capital First, now merged with IDFC First Bank, even during its tough quarters following demonetisation in 2016-17, did not see its gross NPA climb over 3 per cent.

In a media call, Amitabh Chaudhry, MD and CEO of Axis Bank, explained that the inability to force any legal action was a problem in the December quarter, resulting in higher retail NPAs.

Sandeep Bakshi, president, ICICI Bank, says that with December being the first quarter out of moratorium, the stress is particularly high in retail loans. “Retail stress has never been an issue. But there is no doubt we are likely to see stress more than the historic level,” says Sanjiv Chadha, MD and CEO, Bank of Baroda.

Industry experts say while other banks, such as HDFC and IndusInd, may not have revealed much information in their quarterly results, their position may not be any different to their peers.

The worrisome part is that despite banks acknowledging the accumulation of stress in the retail business, the Street seems to be ignoring the warning signs.

For instance, Morgan Stanley’s February 2 report Large private banks: Entering Golden Age — Next leg of rerating cycle notes that asset quality trends have been better than expected at large private banks.

“The trends surprised positively — impaired loan formation was 1.8-2.4 per cent in 9MFY21, versus 1.7-3.4 per cent of 9MFY20,” the analysts note, although they don’t mention that the number appears lower due to moratorium from March–August 2020 and the current dispensation from the SC since September.

According to January’s FSR, gross NPAs may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021. The share of retail assets has grown from 18 per cent in 2012 to 29 per cent in 2020.

Hemindra Hazari, an independent market analyst, calls it the typical deficiency of sell-side research. “In a rising market, they don’t want to call out a problem, as it would be detrimental to the stock,” he says.

Another fund manager says in a liquidity-infused rally, concerns are often ignored.

“If a fund manager misses the flow, it’s a loss for the portfolio. So being aware of the retail stress, we would book profit periodically,” he explains, while adding that the commentary from banks — which hasn’t been assuring on asset quality — supports the decision to book profit.

“The bank’s ability to assess the extent of stress is a little more difficult now,” said Chadha in an analyst call. According to Union Bank of India, managing stress from retail is process-intensive, as lenders will deal with plenty of units and persons. Banks have to expand the bandwidth and reorient branches to handle cases with sensitivity and maturity.

Hazari recalls the Street’s underplaying of retail stress similar to the situation in 2011-12, when the stress in wholesale loans was building up. “Not many pointed it out when it was brewing, and it ballooned into a big problem,” he narrates.

For now, the Street seems to be on the path of repeating the mistake with retail loans. But whether it costs investors dear, will unravel soon.