A few banks, NBFCs find market favour as funding pressure recedes

Asset quality improvement, receding funding pressure boost confidence, with 14 stocks trading near 52-week high

Banks and non-banking financial companies (NBFCs), including housing financiers, went through tough times last year, which also disappointed investors. 

Banking stocks were affected by the spike in bad loans or non-performing assets (NPAs), fraud and top-management related issues, among others. Also, the worries over the Reserve Bank of India’s (RBI's) NPA regulations, introduced in February last year, saw the Nifty Bank index plunge around 15 per cent last March, from its peak level in January.  And, for NBFCs, it was the liquidity issue after a default by IL&FS in September that hurt them the most.

However, some banks and NBFCs, forming part of the BSE 500, have managed to buck the trend and are currently trading close to their respective 52-week highs (or are just about up to 10 per cent from the highs).

So, what has changed? Improvement in the performance shown by large banking players in the past two quarters and receding liquidity issues for some NBFCs have helped win investors’ trust.

For corporate lenders, many have seen their asset quality improve in the December 2018 quarter (Q3) and the trend is likely to sustain given expectations of lower slippages (accounts turning bad) and recoveries from existing NPAs. Axis Bank and ICICI Bank, for instance, reported 102-109-basis point contraction in gross NPAs in Q3 from the peak level of March 2018.

Lower slippages mean lower provisioning for bad loans. Analysts at Macquarie expect credit costs (NPA provisioning as a percentage of loan book) for public sector banks and private lenders to normalise and reach around 160-190 basis points and 100 basis points, respectively, over the next two years. Credit costs for PSBs and private players had reached peak levels of 420 basis points and 200 basis points in FY18, respectively. Improved credit costs, along with interest reversal due to expected recoveries, are likely to lead to 20-50 basis points margin expansion by FY2021, say analysts.

Since NPAs are not a big worry for retail lenders, sectoral NPA levels are more representative of corporate asset quality. Further, change in management at Axis Bank and ICICI Bank, too, aided the stocks.

But, some hiccups such as merger with weaker and smaller banks, asset quality concerns in light of farm loan waivers and market share loss to private lenders put PSBs at a disadvantage over private banks, says Macquarie.

There is, though, a silver lining for PSBs, says G Chokkalingam, founder and managing director at Equinomics Research and Advisory. “NPAs have started peaking out, improving adjusted capital position of PSBs. Also, valuations of PSB stocks are currently very attractive. Hence, some PSB stocks could be worth buying,” he says.

Some PSBs, including Allahabad Bank, Corporation Bank, Bank of Maharashtra — which were recently removed from the Prompt Corrective Action (PCA) framework cheered the Street. There are expectations that these PSBs would now see an improvement in growth rates as there will not be any PCA restriction in terms of branch expansion and lending, among others. A dearth of growth capital and subdued investment cycle though may cap loan book growth.

On the other hand, the retail lending side continues to do well and with an improvement in consumption and the recent reduction in goods and services tax (GST) on under-construction housing property, the outlook has only improved. This augers well for private retail lenders such as HDFC Bank and RBL Bank. Capital concern at PSBs and liquidity issues at NBFCs would also help private retail lenders propel their loan book and so their market share. The high credit-deposit ratio amid slower growth in deposits is another issue the entire banking sector will need to overcome.

Though NBFCs are still feeling the heat of liquidity and asset-liability mismatch, some players such as gold financiers and government-owned financing companies (Power Finance Corporation or PFC, REC) and those with strong parent support such as HDFC are seeing investor fancy. Gold financiers such as Manappuram Finance and Muthoot Finance are benefitting over other NBFCs due to their short-tenure asset structure, making liquidity easily available at relatively lower cost. These companies typically lend for up to one year.  

On the flip side, for some housing financiers and other lenders, exposure to real estate developers is another concern. Analysts foresee asset quality from this basket to deteriorate due to lack of funding to the developers from NBFCs, besides subdued property sales.