Bank stocks dip as RBI admits to potential balance sheet stress in sector

Topics bank stocks | RBI | Coronavirus

With a 3.6% fall, the Nifty Bank index traded below its 200-day moving average
The Reserve Bank of India (RBI’s) financial stability report (FSR) released last weekend, underlining the potential balance sheet stress for banks amid the Covid-19 crisis, impacted investor sentiment on Monday.

With a 3.6 per cent fall, the Nifty Bank index traded below its 200-day moving average. Not only did it underperform the leading market indices, but was also the biggest loser among sectoral indices. Banking stocks were the key reason for the Sensex falling 0.5 per cent on Monday. Th­o­ugh the asset quality stress was expected, the same being highlighted by the RBI was crucial.

Among other key developments over the weekend, Aditya Puri, managing director of HDFC Bank, selling most of his shares before his retirement in October and ICICI Bank’s June 2020 quarter (Q1) results showing higher moratorium also affected sentiment towards banking stocks.

According to the FSR, under the scenarios ranging from baseline to very severe stress, the banking industry’s non-performing assets (NPA) ratio may go up to 12.5-14.7 per cent in FY21, from 8.5 per cent in FY20.  Banks’ common equity tier-1 (CET-1) capital ratio may decline to 10.7-9.4 per cent, from 11.7 per cent in FY20, because of the economic slowdown led by the Covid-19 pandemic, the report said.
Asset quality uncertainty remains a key challenge not only for banks but also for non-banking financial companies (NBFCs). The regulator published the report on Friday last week after market hours.

Prakash Agarwal, head-financial sector ratings at India Ratings, said: “The RBI’s bad loan indications are in-line with our NPA estimates of around 5.5 per cent incremental NPAs in FY21 due to the pandemic.” Though the moratorium from March to August has masked banks’ overall slippages, the actual asset quality will be known from September onwards, especially in the December and March quarters, he added.


According to the FSR, almost half the system’s (NBFCs and banks) loans had availed the moratorium as of April 2020. Though the recent moratorium data, after June 2020 quarter results, from banks and NBFCs shows easing of the moratorium book, it offers little comfort. 

Mona Khetan, analyst at Dolat Capital, said: “Lower moratorium does not necessarily mean banks’ or lenders’ portfolio stress has come down to some extent.” In fact, according to Kotak Institutional Equity, “It would be imperative to highlight that the definition of loans under moratorium is non-standardised across the industry.” This further supports the point of lack of clarity of asset quality stress.

Stress is expected to be higher from sectors, such as tourism and hospitality, construction, and real estate — the three sectors identified as the worst-hit by the pandemic. 
Notably, 60-65 per cent of loans to MSMEs struggling under the current situation were under the moratorium, as of April 2020. However, Khetan said: “Though specific sectoral concentrations (MSME, commercial vehicles, real estate) would impact asset quality, underlying risk management practices would hold a higher relevance in tiding through the current situation.” Thus, FY21 would show the robustness of the risk management system.

Agrawal said while there are near-term challenges, “we believe banks have satisfactory solvency position”. Some experts see a pick-up in credit growth. According to Dhananjay Sinha, director and head of institutional research at Systematix group, “Some indicators, such as currency holding, rising power consumption, and government spending do suggest that credit growth will pick up hereon.” 

Investors have been advised to stick to quality and top names. Some experts hinted that from a medium-term perspective, some banks are available with attractive valuations. HDFC Bank and ICICI Bank are some analysts’ top picks in the banking space.

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