Banks see uptick in credit growth; asset quality likely to improve

After remaining sluggish since the start of the coronavirus (Covid-19) pandemic in March 2020, commercial banks saw some uptick in credit growth during the October – December period of 2021, which could help them report better profitability, analysts said.

Q3FY22 saw loan growth improving due to festive season demand along with pent up demand as there were minimum economic disruptions due to lockdowns. According to Reserve Bank of India’s (RBI) data, year-on-year loan growth of banks inched up to 7.3 per cent by the end of September, from about 6.1 per cent in June end.

"Q3FY22 is expected to be sequentially better on the growth and operational front for lenders, in general, barring a few exceptions,” ICICI Securities said in a note.

“Credit offtake, according to latest RBI data, is showing a gradual improvement and has reached the 7.3 per cent mark, which is mainly driven by retail and MSME segments. Festive and pent up demand is expected to push credit growth,” the note said, adding that monthly credit card spend also crossed Rs 1 trillion mark also pointing to improved demand conditions.

HDFC Bank – the country’s largest private lender  - reported loan book growth of 16.4 per cent year-on-year (yoy) to Rs 12.6 trillion as of December 31, 2021, over Rs 10.82 trillion a year ago. The traction for growth was stronger in the commercial & rural banking segment which grew by around 29.5 per cent over December 2020 and around 6 per cent over September 2021, the bank said.

A report by Motilal Oswal Securities said earnings for private banks are likely to pick up, led by recovery in business growth and fee income and a gradual reduction in credit costs. “We estimate PSBs to see continued traction in their operating performance, supported by modest business growth and a gradual reduction in provisions,” the report said.

Margins for banks are likely to remain steady with some positive bias due to reduction in stress levels.

“NIMs are expected to be largely steady with some positive bias, nearly 3-4 bps, as reduced stress would lessen reversals, healthy CASA would cushion bottoming of interest rates with gradual release of liquidity buffer,” ICICI Securities said.

Asset quality

Most lenders are likely to report improvement in asset quality on the back of better collection efficiency and recovery as economic activity normalised in the absence of any major lockdowns during the third quarter.

“For our coverage universe, we expect the overall gross non-performing asset (GNPA) ratio to decline by 30bps qoq to 6.1 per cent in Q3,” Emkay Global said in a report.

“Fresh retail NPA formation is likely to be lower qoq, as banks have done lumpy recognition in Q1/Q2 and as collection efficiency in standard pools has been trending closer to pre-Covid levels, barring in micro finance, commercial vehicle, two wheeler and loan against property,” the report said.

Asset quality has been improving for banks after peaking in March 2018 when it touched 11.5 per cent. According to RBI data, gross NPA of banks fell to 6.9 per cent by September-end, the lowest in five years. Banks have written off loans aggressively in the last few years which has contributed to a decline in bad loans, apart from the fact that lenders have been extremely cautious in lending to the industrial sector.

With infections spiking sharply in January due to the new variant Omicron, any fresh restrictions could impact collections, analysts said.

“Our discussions with bankers and collection agencies suggest that collection efficiency is trending well so far. However, it could deteriorate, more so in overdue buckets, in case of strict lockdowns restricting customer access/mobility and rising infections among officials amid the fresh wave. We believe this could delay the retail asset quality normalisation story in Q4, in case of full and prolonged lockdowns,” the Emkay report said.

Trading loss

Bond yields have been climbing up after the central bank started normalising the liquidity situation. This would result in loss in treasury activities for the banks.

The yield on the 10-year government bond climbed up 23 bps during the quarter, while that on the 5-year government security rose 14 bps. (100 bps = 1 percentage point). The yield of the 10 year paper has now crossed the psychological mark of 6.5 per cent, which ended at 6.5 per cent on Friday.

“An increase in bond yields would impact treasury performance,” Motilal Oswal Securities said.

“Fee income should see an uptick with better credit growth while treasury income is expected to be muted with hardening of interest rates,” the ICICI Securities note said.

Going ahead, if lockdowns return, with Covid-19 cases rising exponentially due to the new variant, the normalisation in business growth and asset quality, which was expected in the fourth quarter, could be delayed, analysts reckon.