A rise in bad loans, lower treasury gains and slowing disbursals are key issues facing the banking sector.
Decent regulation and insignificant exposure to exotic products has ensured that the Indian financial system has remained relatively unscathed in the current global financial crisis. However, their aftershocks in the present economic downturn are nevertheless staring at almost all the sectors, the fallout of which is reflecting on the Indian banks. Concerns over borrower repayments are leaving banks exposed to the risk of defaults– NPAs are seen as the single largest risks for banks.
That apart, the G-sec rally in Q3FY09 is petering out ensuring that windfall treasury profits would not be repeated in Q4. Lastly, a slowing credit growth is also expected to put a strain on financials, and all these have impacted sentiments. The BSE Bankex has fallen by 25 per cent compared to Sensex’s fall of 7 per cent since the start of the year.
NPA’s - marching ahead
As per IMF estimates, India’s GDP growth is expected to slow down to 5.3 per cent in 2009-10 compared to above 9 per cent in last two years. The signs are evident. Credit growth is down to around 19 per cent and Vaibhav Agrawal, analyst, Angel Broking further expects this, to trend down to about 15-17 per cent in FY10E.
The growth cycle tapering off increasingly dents the earning capacities and thus, impacts debt repayment capabilities of all sections of the society. Consequently, banks face the risk of deterioration in asset quality. The question now is by how much?
As per Moody’s estimates, “In a base-case scenario, gross non-performing loans (NPL) ratio in FY09 and FY10 may range between 3-3.5 per cent and 4-5 per cent, respectively, compared with 2.3 per cent in March 2008. A more bearish scenario increases these ranges by 100-200 basis points (bps), while a favourable scenario would lower them by 50 bps.” Another agency believes that NPAs could rise to 5 per cent in FY11.
Deepak Agrawal, analyst, BRICS securities adds, “Banks with focus on sensitive sectors like real estate, metals and SME (small and medium enterprises) are expected to face large NPAs in FY10. Banks with focus on unsecured retail lending will see high NPAs as well. Among them, ICICI Bank is expected to face high NPAs in the unsecured retail lending portfolio.”
The waning business prospects would gobble up the weakest borrowers first. Apart from SMEs (seen as the most vulnerable), real estate, export oriented (textiles, gems and jewellery) and commodity related companies are also at risk. The exposure to these sectors may have delivered better margins earlier, but top public and private sector banks which have exposure of around 14-18 per cent and 8-12 per cent, respectively are likely to face the pressure. The retail loans segment (over a fifth of total loans) is also facing a strain, wherein the credit cards and unsecured personal loans categories are seen as concern areas.
Even though the present economic down cycle is a difficult one, experts believe the hardships will be relatively lesser on asset quality front compared to the previous slowdowns. Led by high leveraged corporate capex, lower capitalisation and inadequate asset quality monitoring, the GNPA ratio of banks had shot up to around 16 per cent in FY97.
With greater inclusion of equity in the capex (by companies) and improved regulatory changes like stricter NPA recognition norms, higher provisioning requirements and stronger recovery mechanisms (SARFAESI Act) could restrict the rise in GNPA in the current cycle. On the flip side, a prolonged slowdown could result in the NPA cycle getting extended beyond FY10.
Yields - have they yielded?
From the highs of 9.5 per cent in July 2008, bond yields corrected sharply in Q3 FY09 (low of 4.85 per cent)-the result was higher bond prices. This allowed banks to book windfall treasury profits, leading to a significant rise in non-fee based income in Q3FY09. For instance, PNBs trading profits as a proportion of other income (Rs 945 crore in Q3FY09 v/s 483 crore in Q3FY08) increased from 27 per cent to 36 per cent in Q3 y-o-y, on the back of a 150 per cent spurt in trading profits.
With inflation tapering and RBI favouring a low-interest cycle, bond yields were expected to decline enabling banks to repeat their Q3 performance. However, bond yields rebounded from the lows (touched a high of 7.37 per cent) and are now at 6.5 per cent. The reasons: increased government borrowing to fund the stimulus packages, other planned expenditure and sell-off by FIIs.
However, RBI’s recent moves to buyback bonds and call-off an auction (in week ended March 14). This, experts believe, reflects RBI’s inclination for lower yields, which could result in public sector banks (PSBs) to offset some of their mark-to-market (MTM) losses.
| TRADING PORTFOLIO | |
| % AFS of book | |
| SBI | 33.8 |
| PNB | 10.4 |
| BOI | 21.0 |
| UBI | 37.0 |
| BOB | 35.5 |
| Analysts reports AFS: Available For Sale | |
Ravi Shankar, analyst, Antique Stock Broking says, “Banks which have greater AFS portfolio with higher duration, would have larger MTM losses with the yields up, quarter-on-quarter. Higher exposure of AFS portfolio make PSBs more susceptible compared to private banks like HDFC Bank”.
Outlook
While slower loan disbursals and lower treasury profits could impact growth rates in the short-term, the key concern for banks is the asset quality. Quite a few banks have acknowledged that NPAs are bound to increase in the current downturn. However, the quantum of asset deterioration would also depend on how prolonged is the slowdown. Bankers however, believe that GNPAs could go up to 5 per cent in the worst-case scenario.
For now, with the RBI extending the deadline for restructuring loans, banks have got some short-term respite as it will delay the recognition of stressed assets as NPAs up to Q3FY10. This has left the markets to guess the quantum of such restructured assets and its consequent impact for banks. While analyst estimates regarding NPA levels vary, it is only when banks report such numbers (including restructured assets), will the market know the difference (either ways) between bad loans and these estimates.
| GROSS NON-PERFORMING LOANS | |||||||
| In % | FY07 | FY08 | Q1 FY09 | Q2 FY09 | Q3 FY09 | FY09E | FY10E |
| SBI | 2.90 | 3.00 | 2.54 | 2.51 | 2.60 | 3.10 | 4.68 |
| PNB | 3.30 | 2.60 | 2.82 | 2.37 | 2.30 | 2.65 | 4.10 |
| BOI | 2.43 | 1.68 | 1.64 | 1.53 | 1.60 | 1.95 | 4.10 |
| UBI | 2.90 | 2.20 | 2.08 | 1.93 | 1.70 | 2.15 | 3.60 |
| HDFC Bank | 1.10 | 1.10 | 1.50 | 1.57 | 1.90 | 2.00 | 2.57 |
| ICICI Bank | 2.15 | 3.70 | 3.07 | 4.20 | 4.10 | 4.91 | 6.70 |
| Axis Bank | 0.90 | 0.70 | 0.92 | 0.91 | 0.90 | 1.00 | 1.83 |
| E: Analysts reports (average figures) | |||||||
Positively, says a private banker, “We may decide to report the quantum of our restructured assets in Q4 itself.” Should that happen, it will put pressure on other banks to follow suit and clear the clouds over future profitability of banks. That apart, any noteworthy improvement in the business environment, in addition to lower interest rates and cautious lending practices, could help banks limit NPAs, going ahead. Overall, analysts expect most banks to report a decline or at best single-digit growth in profits in FY10, with some improvement in FY11.
