All eyes on asset quality of banks and NBFCs with end of moratorium 2.0

Banking and NBFC stocks were under pressure, with the Nifty Financial Services index declining 2.8 per cent on Monday — more than the 2.2 per cent decline in the Nifty.

The blanket 3-month moratorium ended on Monday, with all eyes now on the asset quality of banks and NBFCs. Though the RBI has offered restructuring and the sentiment is better than what it was a few months ago, experts believe an asset quality overhang still persists for lenders.

Deepak Jasani, head (retail research),  HDFC Securities, says: “While the earnings outlook has improved a bit for banks and some NBFCs, asset quality pressure still persists, and one will have a clear idea only a month or two after the moratorium ends.” He added that after the recent rally, there is  limited margin of safety in most banking stocks. He said that unless there are clear indications of asset quality and a pick-up in credit growth, these stocks could remain volatile. In the past two quarters, moratorium benefits restricted the overall asset quality damage for lenders. Many banks/NBFCs reported either flat or lower gross bad loans sequentially. 
 

However, the second phase of the moratorium gave a breather to banks and NBFCs (refer chart). 

Management commentary regarding asset quality and restructuring for the September quarter earnings would be a key monitorable.