Credit Growth .............................................
Siddharth Purohit, research analyst, Institutional Equities, SMC Global Securities, and Ravikant Bhat, research analyst, IndiaNivesh Securities, discuss the post-PSU banks merger scenario in terms of credit growth prospects of banks:
Under the mega merger scheme of PSU banks, 10 banks will be consolidated into 4 banks. But the real question that arises is, whether merging banks can solve the problem that the industry has been facing for several years. Siddharth Purohit, research analyst, Institutional Equities at SMC Global Securities, says probably the NPA issues will not improve purely due to merger but one can be assured that at least post consolidation the NPA crisis will not escalate further.
PSU banks have been losing market share to private banks and despite the government’s support in the form of capital, the near term scenario remains challenging. How will the PSU banks’ balance sheet look post-merger? Responds Purohit: “While the capital position of PSU banks is likely to improve post-merger and capital infusions by the government, the medium term challenges are likely to persist. I feel they are likely to underperform versus their private peers. While the slippages have been under control for PSU banks, the high exposure in telecom and NBFC sectors, which are reeling under pressure, makes me feel that the trouble is not over for the PSU banks and provisions could remain high for few more quarters.”
Most private banks have taken a one-time write down on their stock of deferred tax assets during Q2FY20 and are migrating to the new marginal tax rate of 25-26% from Q3FY20. Ravikant Bhat, research analyst, IndiaNivesh Securities, feels most private banks that were paying the highest marginal tax rate are benefiting from the reduced corporate tax rate. “This shall directly boost their profitability, RoE, and in turn help sustain better core equity capital,” he says.
BEST-FIT POLICY
The government has applied its best fit analysis to ensure synergies postmerger. Hence, one may want to believe in business as usual scenario. Bhat feels that nevertheless the merger of associate banks with the State Bank of India is an important case in point that highlights that such synergies may take longer to realize. “SBI’s business momentum slowed down post-merger as the bank realized that the erstwhile associate banks needed to achieve further homogenization in credit policies with its parent to ensure uniform credit assessment. This led to a slowdown in balance sheet momentum leading to a dip in credit growth. Something similar might happen with merging banks, slowing down business momentum post merger before merger synergies kick in to improve growth rate,” he adds.
CREDIT GROWTH TO BE 10-12%
Banks have started linking their lending rates to repo rates.
Few large ticket accounts are pending at NCLT for resolution and the recovery from the same would be key to the overall provisions and profitability going ahead. “Purohit is of the view that some pressure on the margin could be there, however, the impact would be limited as the deposit
rates are also trending down. “Credit growth of the banking industry is likely to remain in 10-12% range, which is fairly decent. I feel private sector banks are well capitalized and well placed to capture the growth opportunities that lie ahead of them. Accordingly, I feel investors should stay invested in large private banks like HDFC Bank, ICICI Bank, Axis Bank and can expect handsome return over the next multiple years,” says he.
There are two aspects here: a) overall economic activity driven demand for loans from corporates, and b) issues concerning the NBFCs. Much depends on how well the economy does. Explains Bhat: “As seen in the quarterly results of banks, corporate loan growth has slowed down and has caused the slowdown in headline loan growth momentum while retail loans continue to grow at a healthy, mid-teen growth rate. An improvement in economic activity can push up the credit offtake. There have been some other moving parts.”
Although credit growth in H2FY19 was affected by a slowdown in lending by banks to NBFCs, it appears to have picked up in a robust manner with only select, embattled NBFCs in the housing/real estate remaining affected. Bhat says in the year since IL&FS crisis, the outstanding loans to NBFCs have increased 38.8% yoy to `Rs6.8 trillion as of August 2019. Within personal loans, although there has been some loss in momentum driven by a sharp slowdown in vehicle loans, from 12.7% yoy to 3.7% yoy, the headline growth remains a respectable 15.6% yoy with outstanding personal loans touching Rs23 trillion, he points out.
Notably, despite the slower growth momentum, the share of both personal loans and NBFCs in commercial bank loans has increased 133 bps / 164 bps yoy respectively to 27.3% / 7.9% respectively in August 2019. Large corporate loans increased 5.1% yoy while the medium and micro and small segments showed a negative growth rate in August 2019. Bhat believes that liquidity issues therefore appear limited to select, stressed NBFCs. The continued slowdown in corporate credit offtake has resulted in the share of non-corporate loans rising, he says, adding with project capex continuing to be driven through government sector, appetite for large scale demand for term loans appears weak. Overall, H2FY20E may see some revival in loan demand towards end of year once economic revival appears firm possibly improving overall loan growth to low teens.
BANK NIFTY, BANKEX
The ‘Bank Nifty’ has substantially outperformed the benchmark Nifty as well as Nifty PSU Bank index. CET 1% is the core capital of the banks and is primary benchmark to measure the capital positions. Purohit explains that PSU banks’ stocks have corrected in the range of 5%-35% post the announcement of the mergers. The reason is the high weightage of the private banks in the index, which are performing quite strong. The 4 large private banks - HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank - have a combined weight of 77% in the Bank Nifty and since these banks has been reporting strong operating performance, the private banks stocks and Bank NIFTY would outperform again for next one year vis a vis the benchmark indexes and their PSU counterparts, he adds.
“Similarly the S&P BSE Bankex also has outperformed the benchmark S&P BSE Sensex and I expect the trend could continue in the coming years as well,” he points out.
The Nifty Bank index has rallied 18.5% in the last one year while S&P BSE Bankex index has rallied 20.5% yoy over same period. Both indices containing 10 stocks are dominated by private banks with SBI and Bank of Baroda being the PSBs in Nifty Bank index and SBI being the lone public sector bank in the S&P BSE Bankex.
Bhat maintains that this explains Bankex’ better performance over Nifty Bank index. “Nevertheless, with the current composition, both the bank indices appear poised to deliver steady returns over medium to long term. Clearly, one unending theme for banking stocks is the asset quality issue that is also affecting the private banks now.
More questions are now being raised over the sustainability of stable asset quality in the personal loan segment. Secondly, more private banks have reported exposure to some defaulting corporates with smaller ones like RBL Bank, being a part of Bankex and Nifty Bank indices, their earnings are getting significantly affected in FY20E.
While the bank managements have insisted these as transient issues, bank valuations shall remain affected in near term (H2FY20E-H1FY21E) by news flow on stressed corporates. Nevertheless, with the current composition and over the medium to long term, both the bank indices appear poised to deliver steady returns.”