Analysts bet big on private corporate lenders over SBI

Asset quality improvement shown by the three major corporate lenders – State Bank of India (SBI), ICICI Bank and Axis Bank – in the September quarter (Q2) has been positive.

However, the two private banks are better placed than SBI in this regard.

The Street, too, was waiting to see the asset-quality cycle bottom out after the Reserve Bank of India’s (RBI’s) new bad loan norms in February 2018.

Besides, issues related to fraud and top management changes had left investors jittery towards major corporate lenders in the past couple of quarters. In this context, the asset-quality improvement shown by these top banks in Q2 has helped rebuild investor confidence to some extent in these counters. However, some factors place the private lenders in a sweeter spot compared to SBI, said analysts.

This is also explained by the valuation gap of SBI compared to the private corporate lenders wherein the latter currently trade around two times their respective book value, double that of SBI. Analysts said unless the largest lender surprises on the credit growth front, the valuation gap may remain.

A look at asset quality parameters of these three banks provides some clues. With a sharp 23-36 per cent sequential fall in slippages (loans turning bad), gross non-performing assets (NPAs) or bad loans as a percentage of gross advances of these lenders contracted by 35-75 basis points in Q2. Even watch list/drilldown accounts, which indicates loan accounts with potential to turn bad, reduced in Q2. In the case of SBI, the pool of potential risky accounts as a percentage of advances fell 14 basis points to about one per cent though it was down by a bigger margin of 25-40 basis points for the other two banks (to 0.6 per cent for ICICI Bank; 1.7 per cent for Axis). This improves the earnings outlook as provisioning requirements will be lower amid likely improvement in asset quality, said experts.

For instance, “we expect pressure on asset quality to reduce as the trend in slippages is expected to improve owing to decline in stressed pool of assets,” analysts at Philip Capital said in an updated Q2 report on ICICI Bank. Analysts see 77-190 basis point contraction in gross NPAs of these banks in FY19 from FY18. This would further improve by 100-200 basis points in the next fiscal. However, exposure to non-banking financial companies (NBFCs), including housing finance companies, and delay in resolution of NPAs under the National Company Law Tribunal (NCTL) are monitorables for the entire banking sector. For SBI, the issues could get exacerbated, given the size of loan book (over one-fourth of the total bank credit as of September 2018), if it turns out to be larger-thanexpected. For instance, SBI alone accounts for over 27 per cent of the total banking credit to NBFCs. For now, experts don’t seem too much worried. “NBFC exposure is not a major problem for banks, though near-term growth of NBFCs would get impacted due to the liquidity issue. In fact, buying NBFC loan portfolio would push up the overall banking advances,” said G Chokkalingam, founder & MD of Equinomics Research & Advisory.

But what is making analysts more positive on ICICI Bank and Axis Bank (over SBI) are their higher growth estimates. “Asset quality issue of corporate lenders is improving, which is a positive. However, SBI and other public sector banks have shown muted credit growth, which is better in case of private corporate lenders. This mainly justifies the premium valuation being enjoyed by the latter,” added Chokkalingam. SBI’s reported year-on-year credit growth of 9.3 per cent in Q2 was also below the overall banking credit growth of 11.3 per cent. Axis Bank and ICICI Bank saw credit growth rise 11-13 per cent. Analysts expect SBI’s annual credit growth to be around 11 per cent over FY18-20, lower than the 16-17 per cent estimated for ICICI Bank and Axis Bank (see table). On the capital front, too, the capital adequacy ratio of Axis (16.17 per cent) and ICICI (17.84 per cent) is better than that of SBI (12.61 per cent) as on September 2018.