Q2 Results Review: Private Banks Bruised But Not Battered By Covid-Hit

India’s largest private banks appeared to have come through the first round impact of the Covid-19 crisis with minor cuts and bruises, even though the fallout of any extended slowdown in the economy remains uncertain.

Most large private banks reported an improvement in their net profit for the July-September quarter and a more modest increase in bad loans than feared. Collection efficiency for most lenders improved and some returned to growing their books selectively.

To be sure, a truer picture of the Covid hit to banks will only emerge over the next few quarters as special dispensations provided by the Reserve Bank of India start to wind down.

“We would continue to hold our estimate of 20% stressed assets for the current financial year and wait for the next two quarters to get a clearer picture of the asset quality position of banks. Private banks with their excess capital holdings continue to be well protected against any major rise in stress,” said Saswata Guha, director at Fitch Ratings.

The Real Level Of Stress

Major private sector lenders such HDFC Bank Ltd., Axis Bank Ltd. and ICICI Bank Ltd. have reported a sequential improvement in their gross non-performing assets ratio.

The headline gross NPA ratio, however, doesn’t capture all the stress on bank balance sheets. This quarter banks have reported a pro forma gross NPA number as the Supreme Court has asked lenders not to classify any new account as NPA after Aug. 31. Banks have also reported the amount of loans which had seen asset classification benefits as on Sept. 30, 2020. These are loans which may have been tagged as NPAs if not for one of the special schemes announced by the regulator.

The pro forma gross non-performing assets, added together with loans receiving asset classification benefits, gives a clearer picture of stress.

Going by this metric, HDFC Bank’s total pool of stressed assets would be at 1.8% as on Sept. 30. For ICICI Bank, total stress loans are at 5.72%. For Axis Bank, this number is higher at 6.7%.

Kotak Mahindra Bank has a stress loan pool of 3.1%, while IndusInd Bank is higher at 4.52%. Yes Bank remains the outlier with a higher level of stress loans as it continues to try and clean-up its books of past mistakes.

Provisions Made Upfront

While there is some additional stress on the balance sheets of private banks, these lenders are also holding adequate provisions.

“While it is true that the gross NPA number does not show the full picture of stressed accounts for private banks, we must also remember that these banks have been providing aggressively during the first six months of this financial year,” said Asutosh Mishra, head of research (institutional desk) at Ashika Broking.

Sandeep Batra, president at ICICI Bank, said the bank’s provision coverage ratio had risen to 81.5% as on Sept. 30 from 78.6% in June. Moreover, the bank holds over Rs 8,700 crore in provisions against accounts affected by Covid-19, Batra said in a conference call after the bank’s earnings on Saturday.

HDFC Bank held floating and contingent provisions worth Rs 7,755 crore as on Sept. 30. For Axis Bank, total provisions were at Rs 10,839 crore at the end of the second quarter.

Collection Efficiency Improving

Private lenders have also reported an improvement in collection efficiency, which suggests that any further build-up of stress from loans that were under moratorium may be limited.

HDFC Bank and Kotak Mahindra Bank reported collection efficiency of 95%, while lenders like RBL Bank have reported 90% collection efficiency in the credit card segment. This remains below pre-Covid levels but is slowly improving, said Suresh Ganapathy, analyst at Macquarie Securities.

Loan Growth Inching Up

The second quarter of the current financial year also saw lenders like ICICI Bank, IndusInd Bank and Yes Bank refocussing on growth, at least in their retail portfolios.

ICICI Bank reported a quarter-on-quarter loan growth of 3.32% in the three months ended September, with total loans rising to Rs 6.52 lakh crore. In the quarter ended March, the quarter-on-quarter loan growth stood at 1.5%. According to Batra, disbursals in the bank’s mortgage book had risen to beyond pre-Covid levels, while auto loans have rebounded to levels seen before mid-March.

IndusInd Bank also returned to growth, with loans to the mid corporate segment up 8.84% quarter-on-quarter. According to Managing Director and Chief Executive Officer Sumanth Kathpalia, IndusInd Bank’s upcoming growth phase will be led by auto loans, microfinance loans and secured retail lending products.

Kotak Mahindra Bank, however, remains cautious about expanding its loan book. The bank reported a 0.5% quarter-on-quarter rise in outstanding loans as on Sept. 30 compared with a 1.4% increase in the three months ended March 2020. Dipak Gupta, joint managing director, said the current risk-reward position did not justify “pushing the accelerator yet”. So far, the bank has slowly moved its foot off the brake for certain loan categories such as mortgages, Gupta said in a post-earnings conference call.

Guha of Fitch Ratings said despite having adequate capital, private banks are unlikely to go chasing credit growth immediately.

“We are looking at a 3-5% annual loan growth rate for the banking industry this year and the next. We would expect private banks to utilise their capital to lend to retail and MSMEs in the coming months,” Guha said.

Most private lenders have raised capital to improve their capital adequacy ratio since the pandemic hit.