The June quarter results of the top private banks, ICICI Bank, HDFC Bank and Axis Bank, point to rising asset quality stress. All three have seen an uptick in their non-performing assets (NPAs), though marginally. The quarter net NPA ratio for the three banks is the highest seen in six (HDFC Bank) to 11 (ICICI and Axis) quarters. This assumes significance, given that unlike their public sector unit (PSU) peers, these banks have shown resilience in their asset quality over the past few years, despite a weakening macroeconomic situation and a higher interest rate scenario. Positively, even as the asset quality trends are likely to deteriorate from here on, analysts believe these risks are adequately provided for and, hence, will be more manageable unless the macroeconomic environment deteriorates significantly.
"Private banks' loan selection has been much better than the PSUs'. However, we believe the current (low) NPA ratios of these private banks are not sustainable. Having said that, these ratios will still be much better than that of PSU banks'," says Vaibhav Agrawal, vice-president, research, banking, Angel Broking. Though he is factoring in a 20-30 per cent rise in provisioning in FY14 by these three banks, he believes their provision coverage ratios are unlikely to fall below 70 per cent.
From the stock perspective, HDFC Bank and ICICI have outperformed the BSE Sensex and Bankex over the past year, with Axis being the underperformer. However, at current levels, HDFC Bank is fairly valued at 3.40 times FY14 estimated adjusted book value (closer to its historical average of 3.50). Many analysts believe the stock is more of a defensive play, given its consistent track record over the years, and is likely to remain an outperformer. ICICI Bank (1.43 times FY14 Adjusted Price to Book Value) and Axis Bank (1.28 times) are trading at a discount to their historical averages and analysts see long-term value in them. But, they add, sustained pick-up in the Indian economy is required before these gains can actually fructify. Most analysts prefer ICICI over Axis, given the latter's higher exposure to troubled sectors such as power and infrastructure.
Asset quality, loan growth pressure
An uptick in net NPA ratios (up 10-11 basis points year-on-year in the June quarter), higher incremental slippages and higher provisioning (up 27-175 per cent for ICICI and Axis; HDFC Bank's was down nine per cent) were the key indicators pointing at some pressure on asset quality. On Wednesday, Chanda Kochhar, managing director and chief executive at ICICI, in her post-earnings comments, said , "Total provisions include higher provision of Rs 200 crore over and above the RBI requirements. We have made these provisions towards certain specific accounts".
ICICI and Axis have also reported a slowdown in credit growth, thanks to the weak macroeconomic environment. On Wednesday, ICICI reported the lowest loan growth (of 12 per cent for the June quarter) since the December 2012 quarter when it posted a 15.3 per cent loan growth, thanks to a flattish global loan book, lower loan securitisation for commercial vehicle loans and slowing corporate demand. Axis, too, delivered a subdued loan growth of 15.8 per cent (lowest in three years). Analysts believe slowing loan growth would reflect in net interest income growth.
HDFC Bank, though, has managed to maintain its loan growth at 21 per cent, driven by strong traction in retail advances. Regards NPAs, HDFC Bank's is among the lowest in the sector. However, its net NPA ratio also rose to 0.30 per cent from 0.20 per cent in the year-ago period.
"We continue to believe its asset quality has peaked and it will be a major challenge to improve further. Hence, we factor a slight deterioration from here on", says Hatim Broachwala, banking analyst, Karvy Stock Broking.
A sharp fall in fresh capital expenditure (capex) by India Inc has resulted in a significant slowdown in the corporate loan growth of the banking sector. Unless the capex picks up, this trend is unlikely to change. Analysts believe, given the slowing economy, loan growth for all these banks will moderate from current levels.
Non-core income supports profitability
For the June quarter, while non-interest income for all these banks grew strong between 17 and 33 per cent, a large part of it was driven by non-core and volatile treasury gains. Fee income growth moderated for most, with ICICI posting the lowest growth of 8.9 per cent and Axis leading with 14.1 per cent; HDFC Bank's was 11.7 per cent compared to the year-ago period. Notably, a large part of the fee-income growth came from retail. The moderation is in line with weak corporate demand and lower activity in the capital markets.
The good part is the net interest margin for these banks expanded by 26-49 basis points, thanks to a benign cost-of-funds scenario. Given that these banks have a strong franchise of low-cost current account savings account (CASA ratio between 42 and 45 per cent), the net impact on margins is positive. Overall, the net profit growth numbers were boosted by higher growth in non-interest income.