Growth becomes important as it is critical to ensure that cracks don’t show up in asset quality. Barring Axis Bank and ICICI Bank among private players, other private banks have seen a steady increase in gross non-performing assets (NPA) ratio in the past year. While PSBs are seeing the NPA number shrink, it may not continue to do so amidst the ongoing consolidation. Stocks of PSBs have already absorbed this risk, while their private peers haven’t.
Meanwhile, there is enough evidence to indicate that NBFCs, real estate sector and retail loans may not presently be in a safe zone for banks to be complacent about. The three have been important pillars of growth in the past, especially for private banks, and growth in these pockets has helped the banks to garner higher valuations and investor demand. These positives, too, are being lately put to test. Valuations have eased for names such as HDFC Bank and Axis Bank, while it has cracked up for IndusInd Bank, RBL Bank and Yes Bank, given the deluge of bad news around the sector.
But here’s the good news. Analysts at Credit Suisse note that despite growth slowing, private banks are holding up well on NIMs, due to improved asset pricing and lower corporate slippages. The NIM for private banks continue to hold up in the 3.6–4 per cent range, which is way above the PSB peers who are still struggling to touch the three per cent mark. Therefore, higher profitability leaves the private banks some room to absorb the systemic weaknesses and rebalance their book more favourably towards secured retail products, even if that should come at the cost of foregoing their valuations a little more.
Better margins would also allow them to absorb the cost of linking retail loans to external benchmark, impact of which will be felt from the December quarter.