Indian Banking Sector expects improved profitability - ICRA

The second wave of the covid-19 pandemic posed challenges for banks like increase in overdue levels and higher infection rates among employees, impacting collections and resulting in higher slippages and some increase i n the restructured book. However, despite these challenges, the steady operating profitability and reducing provisioning on legacy stressed accounts continued to provide relief to the bottom-line and the capital position of banks. The GNPAs and the net NPAs remained stable at 7.7% and 2.5% respectively for banks as on June 30, 2021 compared to 7.6% and 2.5% respectively as on March 31, 2021 and 8.6% and 3.0% respectively as on March 31, 2020, i.e. at the beginning of the pandemic.

Of the total restructured loan book of `2 trillion for the banks as on June 30, 2021, the restructuring under covid 1.0 is estimated at 51% of the total restructuring of `1 trillion, while restructuring under covid 2.0 is estimated at 31% of the total restructuring or `0.6 trillion. Moreover, as per ICRA’s estimates, of the total restructuring of `1.0 trillion under Covid 1.0, 60% was accounted for by corporates, 30% by retail and the balance by the MSMEs as on June 30, 2021. The public sector banks (PSBs) were relatively more accommodative in restructuring requests of the borrowers as their restructured books stood at 2.4% of the advances vis-àvis 1.3% of the private sector banks (PVBs).

Notwi t h s t a n d i n g the positive headline asset quality numbers, the fresh NPA generation rate (or slippages) remained elevated during the second wave in absence of regulatory relief such as moratorium. The gross fresh slippages during Q1 FY2022 stood at `1 trillion (annualized slippage rate of 4.1%) compared to `2.5 trillion or 2.7% during FY2021. ICRA expects this to remain elevated at `0.7-0.8 trillion (2.8-3.2%) during Q2 FY2022 but moderate to `1.11.2 trillion (2.0-2.4%) during H2 FY2022 as the impact of second wave wanes.

Commenting on the developments, Anil Gupta, Vice President – Financial Sector Ratings at ICRA Ratings says: “Considering that 30-40% of the loan book was under moratorium during Q1 FY2020 across most banks, the loan restructuring at 2% of advances after the second wave is a positive surprise and much lower than our earlier estimates. Despite the positive headline numbers, we continue to be watchful of the asset quality, given the elevated levels of the overdue loan book and for the performance of the restructured loan book.”

With net NPAs declining to the lowest levels in the last 6 years, the legacy asset provisioning for the banks has been declining in relation to their core operating profits. As per ICRA’s estimates the GNPAs and NNPAs are expected to further decline to 6.9-7% and 2.2.-2.3% by March 2022 which will continue to be a relief for the bottomline of lenders. Despite expectations of moderation in gains on bond portfolios because of expectations of rising bond yields in FY2022, the Return on Equity for banks is likely to remain steady at 4.47.6% for PSBs (5.1% in FY2021) and 9.59.9% for PVBs (10.5% in FY2021).

With increased confidence on the

position of banks, RBI also phased in the last tranche of the Capital Conservation Buffer (CCB) from October 1, 2021, which otherwise was deferred four times in the last three years. This will entail higher regulatory capital requirements, i.e. Core Equity Capital of 8% compared to 7.375% earlier, but the banks are well placed in our view for these enhanced capital requirements. The PSBs raised `103 billion of equity capital (0.18% of risk weighted assets – RWAs) from the markets in H1 FY2022, which followed a capital raise of `120 billion (0.21% of RWA) in FY2021. Large private banks also remain well-capitalized though few mid-sized PVBs could need to raise capital.

Apart from the asset quality, the rollover of additional tier-I (AT-I bonds) of public banks remains to be monitored, given the sizeable quantum (`278 billion) of bonds that have the scheduled call option in FY2022 and FY2023. Apart from State Bank of India, none of other PSBs have raised AT-I bonds this financial year. As per ICRA’s estimates, the PSBs may not need the capital budgeted by the Government of India for FY2022 even with enhanced capital requirements. However, it provisions for any unforeseen events and shall provide confidence to banks as well as investors and credit growth.

“With the improved capital and profitability position of public banks, which accounts for a ~62% share in bank loans, and abundant liquidity in the banking system, supply of credit does not appear to be a constraint. Nevertheless, revival of credit demand and the willingness of banks to push growth will be the key drivers of the overall credit growth in the economy. We continue to maintain our credit growth estimate of 7.3-8.3% for banks for FY2022 compared to 5.5% for FY2021,” Gupta concludes.