The COVID-19 pandemic that struck in 2020 and the lockdown that followed hit the economy hard. As a six-month moratorium was imposed on repayment of loans and businesses struggled to cope with the pandemic, it was expected that banks would see a sharp spike in bad loans and their balance sheets would take a knock. However, the earnings announced in the December quarter suggest that banks are in a far better shape than those expectations, although the larger banks may be doing relatively better than their smaller counterparts.
“Most large private banks and public sector banks reported better-than-expected asset quality performance with contained NPA formation on pro forma basis in third quarter, while the restructuring pool (including the residual pipeline for quarter four) too was lower versus guidance, reducing the tail-end risk,” said Emkay Global Financial Services analysts Anand Dama and Jignesh Shial.
Gross non-performing assets (GNPAs) of public sector banks declined to 7.9 per cent at the end of December 2020 from 8.6 per cent in the September quarter, the analysts’ data showed. Similarly, for private banks the GNPAs have reduced to 3.3 per cent in Q3 from 3.9 per cent in Q2.
A key reason for the fall in GNPAs is a Supreme Court ordered stay on classification of bad loans. However, even pro forma (yet to be classified) GNPAs of banks were lower than industry expectations and gives comfort of a limited stress pipeline into the fourth quarter, with the expectations that NPA resolutions will pick up as the court stay on NPA recognition eases, said the Emkay analysts.
“The lower NPA formation in retail across products (excluding microfinance institutions, cards) was mainly due to faster economic recovery and prolonged payment moratorium feeding into better resolution rates, while ECLGS (emergency credit line guarantee scheme) and restructuring led to contained stress in small and medium enterprises,” said Dama and Shial.
MB Mahesh and Nischint Chawathe, analysts at Kotak Institutional Equities, noted that lower provisions by banks aided in strong earnings growth. While revenue grew 7 per cent from a year ago, net interest income was up 3 per cent, they said.
“The key feedback: corporate India is doing well and was less impacted by COVID, SME has seen good support through the ECLGS scheme while the retail book, especially the secured portfolio is recovering fast,” said Mahesh and Chawathe.
In the backdrop of better-than-expected earnings, earnings upgrades are visible for larger banks, the analysts added.
Meanwhile, credit growth continues to lag deposit growth, point out analysts, despite the fall in interest rates.
At an aggregate level, loan growth was clocking at 6 per cent in January, which is marginally below the growth rate at this time in the previous year. Growth in deposits has been around 11 per cent.
“Most banks have given positive commentary on demand revival in segments such as autos, housing and credit cards whereas large corporate credit/capital expenditure still remains muted,” said Mahesh and Chawathe.
Amid the improved outlook, investors have lapped up banking stocks, driving up their prices. The BSE Bankex index has surged 9.8 per cent in the past one month, while the BSE Sensex is up 3 per cent in the same period.
Shares of SBI, the country’s largest lender hit a 52-week high of Rs 426.45 on February 18. Bank of Baroda also hit a 52-week high of Rs 99.8 on February 19. Shares of private lenders such as ICICI Bank, HDFC Bank and Axis Bank also hit 52-week highs earlier this week.
