Lower slippages, restructuring make private players more attractive.
After having outperformed the broader markets in the last one year, the banking sector has treaded in line with the falling markets in the last one month. The fading performance, say experts, is partly due to concerns over asset quality.
The rise in restructured assets, especially for public sector banks (PSBs), is likely to impact their bottom line as experts feel provision expenses are now going to stay at elevated levels. This could keep a check on their stock performance. While there have been some positive factors like healthy growth in business, there could also be some pressure on margins for some banks.
Asset quality concerns
Asset quality concerns, especially for PSBs, are mainly due to the huge restructuring of loans undertaken by them, which is in the four-seven per cent range of net advances. Among them, Punjab National Bank (PNB), Bank of India (BoI), Indian Overseas Bank (IOB) and Oriental Bank of Commerce (OBC) have seen a rise in slippages in the March 2010 quarter. Credit Suisse, in a recent report, said for 14 state-run banks (except SBI) slippages went up 74 per cent in the fourth quarter as compared to the previous one.
State Bank of India (SBI) also reported higher gross slippages at Rs 674 crore for the March 2010 quarter. “Of the restructured assets, around 9.62 per cent of standard assets (of SBI) have slipped into non-performing asset (NPA) category during the year,” broking firm Sharekhan said. The need for SBI to increase its provision coverage ratio, from 60 per cent to the stipulated 70 per cent level, could see its profits coming under pressure.
Says a fund manager: “The increase in slippages for the sector is not comforting and is also surprising, considering the Indian economy is in a stage of revival. While we may have to wait for a quarter or two to get a clearer picture, any faltering in domestic growth (in light of the global crisis) could accentuate concerns over asset quality.”
Citi’s analysts wrote: “There were signs of higher slippages and restructuring in the fourth quarter (especially PSBs), with more likely to come in the first half of 2011 (past restructuring coming up for review). No big systemic risks are likely, but you still wouldn’t want to take your eyes off the asset quality.”
Margins: Steady so far
In the March 2010 quarter, banks benefited from a decline in cost of funds due to re-pricing of high-cost bulk deposits, resulting in better net interest margins (NIMs). However, some banks could see their NIMs come under pressure. “Most of the re-pricing benefit is now behind us and the coming quarters could witness an increase in the cost of funds. Banks with an agility to pass on the increase in cost of funds and those with higher current accounts-savings accounts (Casa) will be better placed,” wrote Enam Research analysts.
Positively, should credit growth pick up (RBI projects about 20 per cent in 2010-11), it should give some pricing power to banks and provide a cushion to margins. Additionally, the implementation of base rate regime should also provide some support to margins.
Private banks: Better placed
While the overall outlook for the sector appears healthy, concerns over asset quality have seen most analysts expecting private banks to perform better. Bad loans of ICICI Bank, which rose over the past several quarters, seem to have peaked. Its slippages declined steadily in the last four quarters, from Rs 1,300 crore in the April 2009 quarter to Rs 700 crore in the March 2010 quarter.
Similarly, HDFC Bank’s NPAs also seem to have stabilised and are expected to decline as most of the NPAs of Centurion Bank of Punjab (merged with HDFC Bank) is believed to be fully crystallised. These two banks, which are among the preferred picks of analysts, should also benefit from their high Casa ratio (40-50 per cent) and low cost-to-income ratio, as the credit cycle picks up.
