Top banks' asset quality pains are easing, show July-September earnings

Results of SBI, ICICI Bank and Axis Bank indicate respite in formation of fresh bad loans; resolution and recoveries will be important for the trend to sustain

A common thread running through the results of India's top banks that announced their July-September quarter (Q2) results in the past week — these lenders had seen bad-loan issues in the past — is clearly that of an improving asset quality.

While Axis Bank’s numbers gave some cue, State Bank of India (SBI) and ICICI Bank cemented the trend. ICICI Bank particularly deserves a mention, given that its net non-performing assets (NPA) or bad loan ratio, at 1.6 per cent, is inching lower towards pre-asset quality review (pre-AQR) days. The interesting part is that slippages or formation of new bad loans also seem to be easing.

SBI’s 17 per cent sequential reduction in slippages, is the biggest takeaway from its Q2 results. ICICI Bank also saw 10 per cent sequential reduction in slippages. But slippages remained a bit of a concern for Axis Bank, which saw a marginal three per cent sequential rise on this front.

This suggests that while a large part of asset quality run-down of the existing loan book, particularly from the corporate loans portfolio, is probably well behind for these top banks, not all may be okay yet for the Indian banking system. The results of other public sector banks, which are due in the coming days, should provide indication of the same and will be closely watched.

In case of ICICI Bank, however, there was a slight increase in the pool of loan assets that don’t enjoy comfortable rating, known as BBB or below-rated loans. The share of these rose from 30.7 per cent in the June 2019 quarter to 31.8 in Q2. While Axis Bank reduced its watch list (loans with potential to turn bad) to less than two per cent of the total loan book, analysts at JM Financial built incremental slippages of Rs 20,400 crore over next six quarters, forecasting a slippage ratio of 3.1 per cent in the second half of FY20 — that is slightly higher than Axis Bank’s guidance.

For SBI, the concerns are slightly different. There is Rs 16,000 crore to be recovered from three large accounts stuck in the resolution process and the bank has signed inter-creditor agreements (ICA) to resolve loans worth Rs 44,360 crore. While the fate of Essar Steel may be known in a few weeks, resolution of loans under the June 7 circular of the Reserve Bank of India (RBI) will hold the key if NPA numbers for SBI must decline further. The management, though, is confident on this. But December-quarter results will reveal if banks could stich a resolution plan for these dicey cases. For now, analysts at Nomura peg SBI’s asset quality risk at 2.2 per cent, which is manageable according to them. However, in case of Axis Bank, the Street is a tad more apprehensive on the asset-quality outlook.

Asset quality aside, the other important point to note is sharp growth in retail assets. For SBI and ICICI Bank, retail loans form over 60 per cent of total loan book. Analysts say the rise in retail loans is partly by design and partly by default. In other words, limited corporate appetite has forced banks to reach out more to retail customers for loan growth. In the past few quarters, personal loans have grown ahead of other retail loans. Yet their loan book remains largely granular and anchored by mortgages, which may insulate SBI, ICICI and Axis Bank to some extent from a potential retail loan bubble. Home loans account for 37 per cent of Axis Bank’s retail loans, while for ICICI Bank and SBI, over half their retail loans are derived by home loans.

Thirdly, while private banks, including Axis and ICICI, are losing out on mobilising low-cost current account-saving account (CASA) deposits, their ability to raise retail term deposits at competitive rates has helped them trim their cost of fund. In turn, profitability or net interest margin has increased by 30-40 basis points for ICICI Bank and SBI, while for Axis Bank it is up by 15 basis points year-on-year.

Therefore, ticking off the right boxes, analysts expect the stocks of Axis Bank, ICICI Bank and SBI to be in the limelight in Tuesday’s trade after a long weekend.