Lower-than-expected COVID-19 Stress on Banks; FY21-22 Could Be an Inflection Point: Report
India Ratings and Research (Ind-Ra) has revised its outlook on the overall banking sector to stable for FY21-22 from negative due to substantial systemic measures that have reduced the system-wide COVID-19 linked stress below the expected levels and banks strengthening their financials by raising capital and building provision buffers.
The ratings agency has upgraded its FY20-21 credit growth estimates to 6.9% from 1.8% and 8.9% in FY21-22, with the improvement in the economic environment in second half (2H) of FY20-21 and the government of India’s (GoI) focus on higher spending especially on infrastructure. The agency estimates gross non-performing assets (GNPAs) at 8.8% in FY20-21 compared with 10.1% in FY21-22 and stressed assets at 10.9% as against 11.7% previous year. Provisioning cost has fallen from its earlier estimate of 2.3% for FY20-21 to 2.1% (including COVID-19 linked provisions) and is estimated at 1.5% for FY21-22.
For public sector banks (PSBs), Ind-Ra has revised its outlook to stable from negative. It says, "The regulatory changes led to an improvement in PSBs’ ability to raise additional tier-1 (AT1) capital, a high provision cover on legacy non-performing assets (NPAs), overall systemic support resulting in lower-than-expected COVID-19 stress, and minimal surprises arising out of amalgamation of public sector banks (PSBs). Also, the fact that the Indian government has earmarked Rs345 billion for infusion in PSBs in the fourth quarter (4Q) of FY20-21-FY21-22 should suffice for their near-term growth needs."
Ind-Ra's outlook on private banks remains at stable. According to the ratings agency, private banks continue to gain market share both in assets and liabilities, while competing intensely with PSBs. "Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large private banks would benefit from credit migration due to their superior product and service proposition," it added.
The ratings agency sees stressed assets rising to 30% in 2HFY20-21 and 8% in FY21-22. Ind-Ra estimates that about 1.24% of the total bank book is under incremental proforma NPA and about 1.75% of the total book could be restructured by end-FY21.
It says, "As a conservative measure, we have not adjusted for overlaps between those categories. This is the incremental stress purely on account of the COVID-19 pandemic and does not include the slippages that banks would witness in the normal course of business."
Ind-Ra estimates that overall stressed assets (GNPA + restructured) could increase 30% for the banking system, the increase is almost 1.7 times in the retail segment in 2HFY21. The stock of stressed retail assets for PSBs could increase to 2.9% in FY21-22 from 2.1% in FY20-21, while it could increase from 1.2% to 4.3% for private banks, it added.
Excluding the COVID-19 linked stress, Ind-Ra says it expects the provision coverage ratio, excluding technical write-offs for both PSBs and private banks, to reach 75%-80% by end-FY20-21.
"If we consider the provision on proforma gross NPAs, still not considering COVID provisions, the resultant provision cover could be about 70% at end-FY20-21 and FY21-22, while the historic slippage rate will continue and banks still would have Covid provisions as buffers," it says.
PSBs have 0.2%-0.5% provisions while private banks have 1%-2% COVID provisions, most of which is unutilised.
The ratings agency has done a bottoms-up analysis of stressed corporates using two filters, revenues above Rs1 billion and interest coverage below 1.5 times. Ind-Ra says it has assessed that stressed corporate assets as a percentage of gross bank credit declined to 15.3% at end-1HFY20-21 from 15.7% at end-FY19-20 compared with 17.2% in FY18-19 and 20.2% in FY17-18.
"The key reasons for the reduction are low slippages including standstill classification and moratorium, write-offs of 0.9%, and no advances growth in 1HFY21. Of this, 3.5% of total bank assets would be stressed without any external support and would be the source of slippages in the medium term. This would also have overlaps with restructured assets and / or proforma slippages," Ind-Ra says.
Under the emergency credit line guarantee scheme, the union government provided a guarantee to banks and non-banking financial companies (NBFCs) a total guarantee corpus at Rs3 trillion for extending funds to stressed micro, small, and medium enterprises (MSMEs).
Based on the progress seen till 25 January 2021, the funds sanctioned by banks under the scheme totalled Rs1.98 trillion, with 72% of the same already disbursed. Private banks have contributed 43% to the overall disbursements done by banks under the scheme. This is one of the main reasons why the current estimates of stressed assets are lower than expected, the ratings agency says.
According to Ind-Ra, banks have also reported a significant amount of restructuring of retail loans along with slippages into proforma gross NPA in 9MFY20-21. It says, "While private banks have been more adept at underwriting risk in the segment, they also have a higher share of unsecured retail assets where the borrowers have faced a disproportionate impact on their ability to service loans. PSBs with their exposure to government and public sector employees along with a lower share of unsecured assets have been impacted to a lesser degree than private banks."
The ratings agency also pointed out towards continues growth in deposits even with lowest-ever term deposit rates. It says, "Bank deposit rates have been the lowest ever in the last 10 years; but the system still saw an 11% higher deposit growth rate at end-December 2020. A surprising fact is that large private banks' deposit rates are even lower than State Bank of India."
As the economic cycle revives, Ind-Ra says it expects the deposit rates to rise as credit growth revives as well as capital market flows are enhanced.
"Large banks will be able to attract better rated customers by taking advantage of their lower cost of deposits. Thus, in our opinion, it will be challenging for mid or small-sized bank to have an asset profile like a large bank," Ind-Ra concludes.