From Axis Bank to RBL, private banks have their task cut out in FY20

With additional challenges such as fresh stress, loan growth, and escalating costs, the sector faces a tough year ahead

When the head of India’s largest bank, State Bank of India, says that every morning he looks up at the sky and prays to God that the three large accounts stuck in the middle of resolution get sorted out, it is an indicator of what lies ahead for the banking industry in FY20. Likewise, when Amitabh Chaudhry, MD & CEO, Axis Bank, says that he is willing to cede some business for the sake of sustainability, it is again an indication of tough times the industry is likely to go through. While ‘stress or pain’ may be harsh to describe the market condition just yet, such commentaries are a good indication for investors to trim their expectations on banking stocks. 

For public sector banks, the current financial year was seen as one where banks were returning to profit. But for their private peers, expectations were different and quite high given how they have kept growing over the years. “When this financial year started, it was expected that much of the earnings growth will be contributed by banks, mainly private banks. But now, considering the economic slowdown and that the June quarter (Q1) has belied that expectation, that may not be the case,” says Ajay Bodke, CEO & chief portfolio manager, Prabhudas Lilladher. 

Bodke’s less optimistic view emanates from asset quality issues that came back to trouble the sector in Q1. HDFC Bank, which is known for the strongest asset quality, saw its gross non-performing assets (NPA) ratio touch nearly 1.5 per cent in Q1. Likewise, Axis Bank, which was expected to see a decline in NPA numbers, didn’t get much relief. With fresh stress emerging from new pockets over the last six months, this may be a major deterrent for private banks which have until the recent times demonstrated better ability to handle asset quality issues. What could further alter the picture is the prolonged delay in the resolution of large stress cases such as Essar Steel and Bhushan Steel. “Recovery is getting stretched and new names are getting added to the stress list and, hence, it is quite possible that FY20 may not be as bright as anticipated for private banks,” says Alpesh Mehta, deputy head of research, Motilal Oswal Financial Services. 

In anticipation of trouble, RBL Bank has guided for gross NPA ratio touching 2–2.25 per cent in FY20, while for Axis Bank, its additional stress, along with below investment grade book totalling to 3 per cent of the total loan book, puts risk on its asset quality. Stress brewing in agri-loans and loans to small businesses is another key monitorable for the sector. 

To compound the issues, Q1 was also a period of moderation in overall growth for most private banks. With growth in the sub-20 per cent zone for the top three players, loan growth expectations have toned down by 150–200 basis points (bps) for FY20. Personal loans and credit cards remain the main growth drivers for the sector, while some of the important pockets, such as auto loans and home loans, have moderated substantially, in tandem with the overall economic slowdown. It needs to be seen is how the petering-out of growth impacts the overall NPA ratio and profitability. 

 

While the overall cost of funds is largely in check for private banks and given how well-capitalised they are, cost of capital as such may not be a worrisome factor for these players. However, what needs monitoring is how they will balance their deposits, which is an important part to ascertain the movement of the cost of funds. With most banks seeing a plunge in the share of low-cost current account–savings account (CASA) ratio in Q1, incremental deposits seem to be flowing in the form of term deposits, cost of which is 100–200 bps higher than CASA. Given that deposits provide the easiest access to inexpensive capital, keeping a check on the CASA ratio will be critical to preserving profitability in the coming quarters. 

While there are multiple issues which will impact private banks over the next three–nine months, Mehta says sentiments as of now are not in favour of the sector. Bodke adds that for investors it is time to be circumspect, rather than being gung-ho on the stocks of private sector banks. 

While the sector has seen a 10–30 per cent correction in valuations since the start of the financial year, experts advise investors not to take fresh exposure to the stocks unless loan growth stages a comeback.