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:

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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.


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.


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.


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.”

Sid­dharth Puro­hit pre­dicts that credit growth of the bank­ing in­dus­try is likely to re­main in 10-12% range, which is fairly de­cent

Ravikant Bhat be­lieves one un­end­ing theme for bank­ing stocks is the as­set qual­ity is­sue that is also af­fect­ing the pri­vate banks now

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