Published on 11/07/2017 3:30:45 PM | Source: Kotak Securities Ltd

Banking Sector Update Slippages decline 17% yoy to 4% of loans; still above average levels - Kotak Sec

Posted in Broking Firm Views - Sector Report| #Kotak Securities Ltd #Banking Sector #Sector Report

Marginal improvement.

In FY2017, fresh slippages declined 17% yoy largely led by public banks. Gross NPLs increased 24% yoy largely due to weak recovery environment and elevated slippages. Provision coverage ratio improved ~270bps to 45% yoy nudged by18% yoy growth in operating profits. Restructured loans declined 140bps yoy to 2.8% of loans. We do see some early signs of improvement but resolution of problems in key sectors remains the key for instilling greater confidence in the recovery cycle.


Slippages decline 17% yoy to 4% of loans; still above average levels

FY2017 marks the first year in a decade where slippages declined 17% yoy. It still remains uncomfortably high at 4.6% of loans but we see this as a positive development as it is moving in the right direction. Slippages declined 28% yoy for public banks to 4.7% of loans while it increased by 85% yoy for private banks to 4.3%. Recent data from RBI suggests a sharp pullback in SMA-2 loans, which in our view is positive. NPLs in the corporate book are at 19%.


Divergence restricted to a few private and public banks; 0.6% increase in NPLs for FY2016

Exhibit 8 and 9 show the divergence reported by banks. In the reported data, only nine banks showed over 15% variance. The chart shows that of the nine banks, five were from the private sector of which Yes Bank and Axis Bank had the steepest divergence. Among public banks, J&K Bank and IDBI had large divergences. We see an increase of ~0.6% in gross NPL ratio if we adjust this number to FY2016 NPL data taking gross NPLs to 8.4% of loans.


Strong growth in operating profits helps improve provision coverage for public banks

Operating profits grew by 18% yoy with public banks reporting an increase of 19% yoy and private banks 16% yoy. A large share of this increase came from growth in treasury income of ~140% yoy as interest rates declined in FY2017. We saw public banks reporting an increase in provision coverage of ~380bps to 44% while private banks, mainly ICICI Bank, reported a decline of ~380bps to 48%. We expect banks to further improve this coverage as we see stable operating profit in FY2018.


Restructured loans decline to 2.8% of loans from 4% in FY2017

Overall restructured loans declined to 2.8% of loans from 4% in FY2017. Note that a large decline was expected as their SEB exposure was moving out of their portfolios this year as well under the Uday scheme. Fresh restructuring for the year was negligible at 0.7% of loans and it mostly pertains to the infrastructure sector. Downgrades declined ~50% yoy with a near similar decline from CDR as well as bilateral portfolio. ~17% of the slippages was explained by restructured loans as compared to 24% in FY2016 indicating an increase in slippages from the normal book or the watchlist of individual banks.


Data on other formats still not very clear as there could be some overlap

The annual report did give a fair amount of disclosure on 5:25, SDR and S4A. Overall data in all these formats are not too high when we exclude NPL data from them. However, there could be a possible overlap with the restructured loan portfolio. Also, we note that banks have reported flow data as compared to outstanding making it challenging to understand overall stressed loans. We do believe that SDR and S4A have a higher possibility of taking a larger share of slippages from these portfolios as compared to 5:25 where most companies have taken the opportunity to reduce the mismatch in their project cash flows appropriately.


To Read Complete Report & Disclaimer Click Here

For More  Kotak Securities Ltd Disclaimer      


Above views are of the author and not of the website kindly read disclaimer