Notably, the expected asset quality stress is not limited to the corporate segment, but some pockets of banks’ retail book are also expected to be impacted by economic slowdown.
According to Ambit Capital, besides the recent corporate slippages, the economic slowdown would impact unsecured retail loans, agriculture and microfinance loans, commercial real estate and non-banking finance companies, and poor-rated corporates where there is risk of downgrades. This indicates a likely upward revision in the stressed loan book of the banking sector in the near term.
In fact, in Q1, too, besides corporate slippages, some banks had indicated the increased pain in non-corporate book, mainly agriculture, retail and small and medium enterprise segments. HDFC Bank and ICICI Bank, for instance, witnessed rising delinquencies in their respective personal loans, including credit card and other retail segments in Q1.
However, these retail impairments are not significant yet and seem to be cyclical, and analysts also expect some recovery. Also, the overall credit cost in the next two years is likely to remain better than the previous two years. Banks such as Axis Bank, SBI, and HDFC Bank are also expected to benefit from good operating performance.
Some of these expectations on bad loans though are also reflecting in the Nifty Bank index, which is down 13 per cent in the last three months versus an 8 per cent fall in Nifty50.
Overall, investors looking for exposure to banks are recommended to be selective.