Kotak Institutional Equities Research sees banks showing further improvement in key metrics. Impairment ratios are likely to decline led by lower slippages, recovery as well as high provisions for bad loans. Recapitalisation would result in most public banks reporting a sharp decline in net NPL ratios.
NBFCs had a marginally better quarter than Q3 as liquidity eased for retail players. Slowdown in auto sales and increase in incremental cost of funding will weigh on Q4 performance, it said.
Banks: stable performance overall
Kotak expects banks under its coverage to show stable operating performance, though the massive recapitalisation in public banks could result in banks lowering net NPL ratios by making higher provisions. Loan growth has been stable at ~14-15 percent for the quarter with better negligible pricing pressure resulting in NII growth of 21 percent. Treasury contribution is likely to be sharply lower QoQ. Asset quality will show further improvement, it added.
Among banks, Kotak continues to maintain a positive outlook on corporate banks including ICICI Bank and State Bank of India. IndusInd Bank would have a challenging quarter (due to IL&FS exposure) while the focus on HDFC Bank would be on revenue composition. Third party fees would be lower considering revision on upfront/trail fees from mutual funds. Yes Bank would see a sharp slowdown in business growth and the commentary from the new management would be a key monitorable, it said.
Asset quality to show further improvement; slippages to ease but credit costs would be high
Kotak feels that the unrecognised stress in corporate loans is negligible especially post IL&FS crisis as risks emanating from real estate are not too high. Resolution through the IBC framework has slowed as several high profile cases could not reach a conclusion as anticipated earlier. However, progress continues outside through settlements/upgrade/write-offs etc.
In its note, Kotak says that the government’s recent capital infusion program would result in these banks choosing to make aggressive provisions to bring down net NPLs of a few banks to ~6 percent, which gives them headroom to come out of PCA. The research firm maintains its key theme on playing the recovery for corporate banks with a positive outlook on corporate banks like SBI and ICICI Bank. IndusInd Bank would have another quarter of high provisions. Stress in retail loans remains unchanged and low.
NBFCs: A tad better
According to Kotak, Q4 was a tad better than Q3 with improved liquidity for most NBFCs. While loan growth picked up in select segments (retail housing, LAP etc), auto finance was weak reflecting the slowdown in volumes by large OEMs. Sharp rise in incremental funding costs after September 2018 will likely reflect in lower NIM for the quarter. Seasonal trends suggest that asset quality performance improves in Q4 though strong recoveries over the last few quarters set a high base. Wholesale lending business continued to remain muted as many NBFCs continue to struggle on the liquidity front.
After the sharp rally, Kotak has revised rating on LIC Housing Finance to 'Add' from 'Buy' (fair value of Rs 590, unchanged) and Muthoot Finance to 'Reduce' from 'Add' even as it raised the fair value to Rs 600.
System loan growth remains robust at 15 percent YoY
As per the latest available data (February 2019) for the banking system, loan growth has maintained a robust pace of growth at ~15 percent YoY, compared to 10-11 percent in 4QFY18. The pick-up in the pace of bank credit has been driven by a sharp spike in retail loans and lending to NBFCs. Growth in retail loans has been driven by strong uptick in unsecured loans like credit cards and personal loans, it said.
The pace of growth in credit cards has seen a slight dip over the last few months. Housing loans have seen a modest upward push to 20 percent YoY. There has been a slowdown in lending towards secured products like auto and commercial vehicle financing mainly on low growth in the industry. Demand for commercial vehicles will likely pick pace in 1HFY20E on account of pre-buying due to new BS-VI norms, it added.
The relative tightening of liquidity is resulting in an increase in the borrowing cost of alternative sources of borrowings like commercial papers and debentures. This has made bank funding for NBFCs an important medium to maintain liquidity resulting in a robust growth of lending to NBFCs at ~50 percent YoY in January-February 2019. Corporate loan growth, though muted, continues to crawl upwards (up 5 percent YoY in February 2019), the research firm said.
Corporate loan growth remains muted
According to Kotak, corporate loan growth trends were broadly unchanged during the quarter as corporate loans saw tepid 5 percent YoY growth in February 2019 as per the latest RBI release. Corporate loans continue to increase albeit a slow pace. Slowdown in capex investments has led to lower fresh disbursements in the space. Rising slippages from the corporate book from 2HFY18-1HFY19 clubbed with lower disbursements led to muted loan growth in this segment.
However, loan growth varies across segments in the corporate space. While lending to the overall infrastructure space remains low, fresh disbursements in the renewables space have increased. Most banks have increased focus towards lending to better-rated corporates where the competition is relatively higher. The share of A+ and above rated loans in the overall corporate loan mix has seen improvement for Bank of Baroda over the last few quarters, it said.
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