Earnings Recovery at Risk
Earnings for 1QFY20 alluded to early signs of moderation loan growth, rise in non-corporate slippages across several banks, and sluggish corporate recoveries. PPoP growth at 12% YoY for the sector despite healthy treasury gains was a disappointment. Consequently, earnings recovery for the banking sector could be slower than factored earlier. Nonetheless, higher treasury gains should provide some fillip to earnings in the immediate quarters. Amidst a weak operating environment for banks, our preference the safer bets continue.
Non-corporate Slippages Rise Across Several Banks
While corporate slippages were contained during the quarter, slippages from the non-corporate segment were higher for several banks (mainly PSBs) driven by higher SME and agri slippages. Higher slippages from agri portfolio is attributable to seasonality and impact of loan waivers, while higher MSME slippages were led by end of forbearance under June, 2018 circular in 1QFY20 on NPA recognition for the select MSME loans (from 90 days to 180 days). As of 4QFY19, ~Rs80bn of MSME loans were retained as standard under June 6, 2018 circular, mainly by public sector banks.
Gross NPAs Ratio Inch-up Across Private & Public Sector Banks
At an aggregate level, slippages ratio at 3.5% continued its upward trend for the second consecutive quarter after declining for previous three quarters (from 1Q-3QFY19). Higher slippages were led by SBI, followed by Yes Bank, IDBI Bank and Axis Bank. With several corporate downgrades during H1FY20 so far, the risk of rise in corporate slippages has increased. Despite being elevated, write-offs at 2.2% of advances were lower compared to previous two quarters (>3%). While overall GNPA quantum was sequentially stable, GNPA ratio increased marginally to 9.7% from 9.5% in 4QFY19 driven by sequential decline in advances.
Loan Growth Moderates for Private Banks
The quarter witnessed softer loan growth over previous year for the private retail banks including HDFC Bank (HDFCB), Kotak Mahindra Bank (KMB), IndusInd Bank (IIB), and DCB Bank (DCBB). This was driven by multiple factors including weaker growth in auto/CV loans for HDFC/IIB/ Kotak. However, loan growth trends remained stable for corporate banks including SBI, ICICI Bank and Axis Bank, partly driven by their low base. Even as domestic loan growth moderated, overall loan growth was slightly higher at 11% YoY. Looking ahead, the PSB re-capitalisation will remain critical to improvement in system growth.
Corporate Banks’ Earnings Miss Estimates Despite YoY Growth
Though the overall earnings for banks under our coverage were below expectations, the same witnessed sharp recovery on YoY comparison, on the back of a low base and healthy treasury gains. While the private banks’ profit increased by ~84% YoY, the PSBs reported profit of Rs8bn following losses for nine consecutive quarters. 5 out of 19 PSBs reported losses in 1QFY20 as against 14 in 1QFY19 (13 in 4QFY19). Decline in margin was driven by continued pressure on cost of funds and seasonally weak sequential loan growth in 1QFY20. CASA ratio continued its southward trend across private and public sector banks, impacting cost of deposits.
We Prefer Private Banks with Strong Deposit Franchise, Limited Concerns over Corporate Book
We continue to remain cautious on PSBs, as capital constraints and weak spreads should limit any meaningful expansion in RoAs. Moreover, risk of rise in non-corporate slippages is another emerging concern. Our preference for banks with strong retail liabilities continues, as we believe the recent challenges on deposit accretion could be a structural one. Also, with rising risks of increase in corporate slippages from select leverages names, we prefer banks with limited exposures to these. We like ICICI Bank and HDFC Bank in the large-cap space and Federal Bank in the mid-cap space.
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