Low on investor confidence and growth, private banks in for tough days

Majority of private bank stocks are down 10-33% YTD, indicating weaning conviction in the sector

Private bank stocks are probably an example of how quickly strong narrative and conviction can change in a short span. Irrespective of the size, stocks, such as RBL Bank, IndusInd Bank, Axis Bank, HDFC Bank, and ICICI Bank, were easily among the most bought until some time ago. However, with the exception of AU Small Finance Bank (AU SFB), these stocks have seen a 10-33 per cent price erosion year-to-date, as compared to an 8.9 per cent fall in the BSE Sensex during this period.

Perhaps for the first time in nearly a decade, private banks are being challenged on the very pillars of their strength — growth and investor confidence. With YES Bank’s failure, a section of investors feels it is time they took some money off these stocks. A top-rated fund manager says that when India’s fourth-largest private bank fails, it will prompt investors to relook at their portfolios. “Most of us (fund managers) are heavy on private banks accumulated over four years and wherever possible we will book profit,” he said.

Analysts at Kotak Institutional Equities warn that with three back-to-back financial institution failures (IL&FS, PMC Bank and YES Bank), it will be a lot more challenging for players to raise liabilities. 

Sonal Verma, chief economist, Nomura, cautions: “YES Bank’s failure may prompt a shift in deposits from smaller private sector banks to the perceived safety of public sector banks.” This, she says, in turn, will constrain the ability of private sector banks in growing their loan book, an aspect that turned troublesome two quarters ago. Considered as a cheap source of funds, with the blended cost of deposits lately contained at 5.5 -5.8 per cent (the overall cost of funds at 6.2–6.5 per cent) in the December quarter, private banks are likely to see some pressure on retaining this money. “It is likely that to retain retail customers, some banks marginally increase deposit rates,” said an analyst. All this will only compound the existing problem of growth.

Considering that banks are reckoned as a play on India’s GDP growth, which has seen severe downgrades over the past three quarters, not many analysts saw private banks slowing their run-rate until a few months ago. While Axis Bank and ICICI Bank somewhat kept up with their past growth trajectory of 15 – 18 per cent, especially on the retail side, others such as IndusInd Bank and HDFC Bank missed their historic run-rate of 25 per cent-plus (especially on the retail front) by a reasonable margin. Even RBL Bank was way off its 35–40 per cent mark in the December quarter. Worse, as Siddharth Purohit of SMC Capital says: “There could be more moderation in growth as banks would be more risk-averse now. Also, retail loans-led growth could not go on forever.”

While lower growth is still acceptable, the same along with asset quality pressures (whether from corporate or retail loans), which saw gross non-performing assets (NPA) ratios of all banks (barring ICICI Bank and ­­­­Axis Bank) touch a fresh four-year high, isn’t going down well with the Street.

Varma expects pressures likely from the telecom sector and non-banking financial companies (because of real estate and small business loan-related stress) to keep the banking sector’s asset quality on tenterhooks. “We see considerable headwinds on the systemic asset quality. Banking sector gross NPAs are likely to rise, as deleveraging under the growth slowdown gets trickier,” she warns. Besides, the fast-spreading impact of COVID-19 globally and in India has forced analysts to sharply cut the GDP target for the June quarter. Nomura slashed its expectations from 4.5 per cent to 4 per cent.

For investors, these clearly signal to tone down expectations. Even if top-quality stocks, such as HDFC Bank, Axis Bank and ICICI Bank have undergone valuation correction, waiting out the March quarter may be prudent before taking fresh positions in these names.