Asset stress eases in top banks

RESULTS SHOW REDUCTION IN NEW BAD LOANS IN SECOND QUARTER RESOLUTION, RECOVERIES KEY FOR TREND TO SUSTAIN

The common thread to link the results of India’s top banks, which have published their September quarter (second quarter, or Q2) results over the past week and which had seen bad loan issues in the past, is clearly that of an improvement in asset quality.

While Axis Bank’s numbers gave some cue, State Bank of India (SBI) and ICICI Bank cemented the trend. ICICI Bank deserves mention, given its net non-performing assets (or bad loan ratio) at 1.6 per cent is inching lower towards pre-asset quality review days.

Slippages or formation of new bad loans also seemed to ease. SBI’S 17-per cent reduction in slippages is the biggest takeaway from its Q2 results.

ICICI Bank also saw 10 per cent sequential reduction in slippages. Slippages remain a concern for Axis Bank, which saw 3-per cent sequential rise. This suggests that while a large part of asset quality run-down of the existing loan book is well behind for these top banks, not all may be satisfactory for the Indian banking system.

In the case of ICICI Bank, however, there was a slight increase in the pool of loan assets which don’t enjoy ‘BBB’ or below-rated loans, the share of which rose from 30.7 per cent in the June 2019 quarter to 31.8 per cent in Q2.

While Axis Bank has reduced its watchlist (loans with potential to turn bad) to less than 2 per cent of the total loan book, analysts at JM Financial build incremental slippages of ~20,400 crore over the next six quarters, forecasting a slippage ratio of 3.1 per cent in the second half of 2019-20 — this is higher than Axis Bank’s guidance.

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

Asset quality aside, the other important point to note is the sharp growth in retail assets. For SBI and ICICI Bank, retail loans form over 60 per cent of the total loan book. Analysts say the rise in retail loans is partly by design and partly by default. In other words, little appetite from corporates has forced banks to reach out 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, to some extent, insulate SBI, ICICI Bank, and Axis Bank 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 lowcost current account savings account deposits, their ability to raise retail term deposits at competitive rates has helped them trim the cost of funds. In turn, profitability or net interest margin has increased by 30–40 basis points (bps) for ICICI Bank and SBI, and by 15 bps year-on-year for Axis Bank.

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