Private retail banks put up good show

Spike in provisions likely to be short-lived and could reverse for IndusInd Bank and YES Bank

Private sector banks, particularly those having a higher exposure to retail loans, continued to put up a strong performance in the March quarter (Q4). This is even as they complied with the Reserve Bank of India (RBI)’s directive to provide more loans for stressed sectors. The apex bank’s directive has led to private banks such as HDFC Bank, Axis Bank, IndusInd Bank and Yes Bank witnessing a surge between 66 per cent and 121 per cent in their provisions in the quarter compared to the same quarter a year ago. The surge in provisions, however, has failed to dent their profitability. A key reason behind the strong performance is that they had continued to gain market share and grown their core income stream — net interest income (NII) at the robust pace. NII is the difference between the revenue generated from a bank’s assets and the expenses associated with them.

This, in turn, had helped them reap higher operating profits (see table). On the other hand, performance of the corporate-facing private banks — ICICI Bank and Axis Bank — was in contrast to the other banks mentioned above. At four and 10 per cent, these two banks’ NII growth was much lower than that of the other three banks which grew by 22-32 per cent. The continued stalemate in the corporate credit offtake, which is witnessing some activity in the working capital loans as well as the refinancing segments, is a key reason for their slow topline growth. As India Inc’s capital expenditure remains stagnant, credit demand has fallen to historic lows. Given the slow economic growth, banks have become more careful while lending to the corporates.

Suresh Ganapathy, banking analyst at Macquarie Capital, says, “The private sector banks continue to grow strongly and capture incremental market share. While their asset quality problems are coming to the fore, these are much lower than that of the public sector banks. We still stick to the private sector banks, and HDFC Bank, Yes Bank and IndusInd are my top picks.”

The quarter though witnessed a weakening of asset quality for most of these private banks. However, large part of the higher provisioning for IndusInd and Yes Bank were towards the cement sector (JP group), which could be upgraded in the coming months, as it is a part of the impending marger and acquisition transactions. “Yes Bank’s corporate book has ridden out the worst part of the cycle, and, barring the occasional credit incident such as this, we do not see a major upward risk to credit costs,” says Seshadri K Sen, banking analyst at JP Morgan.

Federal Bank, too, posted a very healthy performance in Q4 and witnessed a decline in provisions, as asset quality improved both in the retail as well as corporate loans. As against the gross non-performing assets (NPA) ratios of five per cent and eight per cent, respectively, for Axis Bank and ICICI Bank, other banks posted rather low gross NPAs ranging between one and three per cent, and hence lend comfort. In case of ICICI Bank and Axis Bank, too, large part of the bad loans’ recognition seems to be done and overall asset quality worries seem to have bottomed out.

Santosh Singh, banking analyst, Haitong Securities, says, “Provisions are elevated and will remain elevated. The key is that the pool of bad loans is not moving sharply. The entire NPAs for the bigger private sector banks are coming from two buckets — restructured book and the watchlist. That is the key reason why these stocks were doing well despite higher provisions.”

Overall, in this environment of subdued credit demand, incremental growth will be difficult to come by. Banks with huge bad loans will go slow on lending as they focus on resolution of such loans. This will provide further opportunities for market share gain to the better placed retail-focused private banks. This explains why the Street remained positive on the select names like HDFC Bank and IndusInd, amongst others.