Provisioning to stay high for banks in Q3

■ Delinquency trends in retail loans likely to deteriorate

The pace of new bad loan formation for banks is likely to remain elevated for the quarter ended Decem-ber 31, 2019 due to the recognition of lumpy corporates like Dewan Housing Finance Ltd, Reliance Home Finance and Reliance Commercial Finance, Suzlon Energy, CG Power & Industrial Solutions and some real estate companies.

Banks have recognised DHFL and Cox & Kings as fraud and those that have an exposure to these accounts will have to provide 100 per cent upfront for the exposure. Also, some large corporate groups remain stressed, including Essel, Cafe Coffee Day, while there are new additions in the recent past like Vodafone, Altico, Omaxe, Peninsula Land and Karvy Broking, leading to heavy corporate stress loans pipeline. While DHFL’s total debt is about Rs 80,000 crore, lenders exposure to the account is around Rs 40,000 crore. Similarly, banks have an exposure of over Rs 5,000 crore to Reliance Home Finance, Rs 4,970 crore to Coffee Day Enterprises and more than Rs 4,000 crore to CG Power.

On the positive side, resolutions too have gathered pace, such as Essar Steel, Ruchi Soya, Prayagraj Power Generation Company, Rattan India Amravati and Coastal Energen. Factoring in some of these resolution in Q3, including Essar Steel, the non-performing assets could moderate for lenders that have an exposure to these accounts.

For instance, both HDFC Bank and IndusInd Bank that have announced their Q3 FY20 earnings saw a steep rise in loan loss provisioning due to their exposure to DHFL. On Saturday private lender HDFC Bank saw provisions and contingencies rise by 38 per cent to Rs 3,043.6 crore for Q3FY20, as against Rs 2,211.5 crore in Q3 FY19. The specific loan loss provisions in the current quarter included oneoffs of about Rs 700 crore, primarily relating to certain corporate accounts and specific agri accounts, the bank said.

Despite lower net interest margins and higher loan loss provisions of 130 basis points, HDFC Bank reported a net profit of Rs 7,400 crore, up 33 per cent YoY, mainly helped by strong fees and non-performing asset (NPA) recovery. Fresh NPAs were elevated at Rs 5,300 crore including Rs 1,500 crore, mainly due to lumpy corporate and continued stress in agri (seasonal trend/loan waivers). Healthy credit growth at 20 per cent YoY was driven by better corporate growth, but retail remains subdued at 14 per cent YoY due to slower vehicle finance growth.

Similarly, IndusInd Bank reported lower-thanexpected net profit due to a steep rise in provisioning, led by higher bad loan formation and further improvement in provision coverage ratio. IndusInd Bank has classified DHFL and Cox & Kings as fraud.

“Factoring in some of these resolution in Q3, including Essar Steel, we expect NPA ratio for our coverage universe to moderate by 20 bps to 6.9 per cent. Corporate resolution pipeline too looks strong, including KSK Mahanadi, Rattan India Nashik, Alok Industries, IL&FS and the long-pending Bhushan Power as well.

“As far as retail asset quality is concerned, we believe delinquency trends in loan against property and unsecured loans are likely to deteriorate given weakening economic trends and rising unemployment rate. Agri stress may recede a bit in Q3 due to healthy rabi crop, which could be positive for PSBs and HDFC Bank. SME stress remains elevated, particularly for PSBs through Mudra loans,” said Anand Dama, analyst at Emkay Global.