To understand more about asset quality, to understand banking sector and the financial sector generally, CNBC-TV18 spoke to Ashish Gupta, MD-Investment Banking-India, Head of Research at Credit Suisse India.
The deadline for lenders to resolve the default cases in the Reserve Bank of India’s (RBI) second list ended yesterday and as per some reports 22 out of 28 companies will go to the National Company Law Tribunal (NCLT).
According to Gupta, the provisioning requirement in th second list is higher because RBI’s second list has newer NPAs with lower provisions.
Market should not look at provisioning requirement for six months but at 18 months, said Gupta.
He said banks need 65 percent provision coverage on stressed assets. The aggregate provision coverage amongst banks is 42-43 percent.
He said at Rs 13 lakh crore loans we could be at the peak of impaired loans in banking industry.
Post recapitalisation of PSU banks, they are expected to do well, he said.
He said although during recapitalization news they shifted some weight from NBFCs to PSU banks, for all NBFCs the business case does not go away just because yields have gone higher.
Many of NBFCs have strong asset franchise, very strong niche business - like gold financing, rural financing, truck financing etc and these competitive advantages for them would continue, said Gupta.
So, the house is still positive on NBFCs that can sustain high growth rates.
When asked about credit growth, he said it should not be difficult to see double-digit growth in Q1FY19 on back of nominal GDP growth in double-digits.
Below is the verbatim transcript of the interview.
Latha: The second list has also gone, the deadline ended yesterday, what is your sense of the provisioning that will be needed. Do you think considering that most of them have gone to National Company Law Tribunal (NCLT), banks are largely provided?
A: We actually are not yet fully aware that of the list of 28-29 cases that Reserve Bank of India (RBI) had, how many are actually going to the Insolvency and Bankruptcy Code (IBC). Of course in terms of numbers, whatever reports we get, more than 20 are going but I think from provisioning side what is more important is in value terms, so, are some of the larger companies going or not going, that is probably more important.
In terms of provisioning requirement, that actually is higher in the second list because many of the companies in the second list were newer NPAs, so banks had lower provisions to start off with and therefore the incremental provision requirement if all these second list of companies goes, is about 0.5 to 1 percent of loans for individual banks.
Latha: In the beginning of the year, you had put out a report saying that with the aging of NPAs itself, Rs 85,000 crore more of provisioning will have to be done by the banking sector. Now what does your provisioning number stand at, I am on the aggregate number, you said 0.5 percent of the total book to 1 percent, we find that arithmetic a little difficult, you tell us how much more provisioning will be needed.
A: That arithmetic has got complicated because some of the provisioning is getting up-fronted. So, if you look at the IBC cases, just because of aging, you might have not needed so much provisioning but RBI mandated more upfront provisioning. I think at this point of time, what market should look at in not just provisioning what is needed in the next six months, but more look at what is the aggregate provisioning needed on the next 18 months because we now have a fair bit of idea, what is the total pool of stressed assets that are out there in the system. For the first time we are getting some sense what is the loss given default or haircut these will mandate.
So yesterday was also or day before was the last date for getting bids on Monnet Ispat and so as those details come out, I think banks will have a fair bit of idea on what is the extent of provisioning that is needed on the entire pool of stressed assets and where they are currently. Our estimate is that banks at aggregate today only have about 42-43 percent provision cover, but what they need is about 65-70 percent provision cover over the next 18 months and that is why the capital that is being provided by the government comes in handy.
Sonia: Have the bad loans in the banks moderated in the last say two to three months and also with more cases now falling under the NCLT, when do you expect to see a peak as far as the NPA cycle is concerned?
A: I think we should differentiate between the bad loans, impaired loans, and the NPAs. So as per our aggregation, today the NPAs in the banking system is about Rs 8 lakh crore or about 10 percent of loans, but the total impaired loans is about Rs 13 lakh crore or about 16 percent. So there are a lot of loans sitting in restructured, watch list, Strategic Debt Restructuring (SDR), etc. and these are pieces which we believe will probably flow into NPA over the next 12-18 months.
So in that sense, the NPA number will continue to trend up but we are actually more hopeful that the aggregate bad loan number at that Rs 13 lakh crore is close to peak. So if you work out on base of provision requirement based on that number, I think we should hopefully not get too much negative surprise.
Anuj: In that case, how to approach the PSU banks because we had a big rally after that recapitalisation, half of those gains have been given up, how to approach that space now.
A: I think one thing we clearly have to wait for is the details of the recapitalisation plan. Our strategy within PSUs has been to look at banks that have stronger core operating profitability. Within the PSUs, I think one part that is well appreciated is the extent of impaired assets they have on their book but I think an equally important part is how the core operating profitability is and some of them, the core operating profitability, is fairly weak and therefore the concern is even when you provide for this NPA, even after you get the capital, how much profit they can generate, what return on assets (RoA), return on equity (RoE) you can generate.
However, there are three or four PSU banks that have good core operating profitability and we believe for investors who have a one to two year time investment horizon and can tide through this period where there is this uncertainty of when the recapitalisation will come and of course there will be a big dilution, but after that, as this bad loan mess gets cleared off their book, you get to a scenario where they start trading this down their core profitability.
Latha: Your compliance allows you to name those.
A: We can’t name those.
Latha: What about, let me come to the bigger theme which we want you to address, NBFCs, now that we have seen yields going to 7.2 percent and of course the non 10-year yields have even got a 7.4 percent, are you trimming NBFC positions and if you are, what are you replacing them with?
A: We took some weight off the NBFCs and we added PSU banks at the time of the recapitalisation. What we however still believe is that not all NBFCs, the business case goes away just because yields have gone higher. The fact is many of the NBFCs are strong, asset franchised, they have very strong niche businesses, someone is good in gold financing, someone is in good in rural financing, someone does truck financing very well, and those are competitive advantages that continue. Of course there is some tempering of expectations of margin expansion because the funding costs, etc. has gone higher, but I think for those NBFCs that can sustain their growth rates, we are still positive on.
Latha: Will you give them 8 times like some very good NBFCs got?
A: Valuations is a concern so we have a trimmed weights on the NBFCs where we felt either the valuations are excessive or the relative risk-on margins is higher. The framework there is those NBFCs that are doing more plain vanilla lending, say just salaried mortgages or are more dependent on bond market for the funding, so, those will see a larger pressure on their profitability.
Sonia: Coming back to the overall picture, you told us about how the impaired loan situation could be at a peak now. What about credit growth? Are you noticing any signs as far as credit offtake is concerned?
A: There, the situation is not as bleak as generally borne out. I think the 5 percent credit growth that we had last year had several one-offs as well. And with the kind of nominal GDP growth that we have in double digit, it should not be too difficult to get a double digit credit growth. Last year, we had several other factors impacting credit growth. Some credit growth went to the bond market because there was excess liquidity and bond yields were low.
Now we are seeing reversal of that and therefore, some credit growth to the banks will come back from the bond market. You also had those three months of demonetisation where credit growth was actually negative. So if you look at sequential trend in credit growth this year that indicates that by first quarter of next year you will be in double digit credit growth.
Latha: Generally, what is the sense about growth in the economy itself? Through the finance sector, obviously you are a proxy for, you are measuring even growth. Can we be confident that things will pick up, the GST disruption will be behind us and FY19 the growth numbers are going to be much better?
A: Clearly, the outlook is positive for next year. There is a pick up from the slowdown we saw in the last six months, but of course, it is a mixed pack. You still do not see the investment side, new project announcements that really picking up. But on the consumption side, services side, trade side, things are fairly good. Exports is one area, particularly manufactured exports, that has been a disappointment, but services export, tourism, those are actually still doing better.
Latha: Corporate banks or retail banks, what is your preference?
A: We actually now have a mix of both corporate and retail. We are not so exclusively concentrated on the retail banks. In our top picks there is a mix of both corporate and retail banks. In retail banks as well, there are some names we do not like, we think valuations are excessive and growth is not supportive of valuations. The key will be pockets where there is growth, whether it is corporate banks, retail banks, NBFCs, they will continue to do better.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
