Tuesday, March 2

Signs of sustainability in banks: Analysts

MUMBAI: Large corporate-focused lenders that bore the brunt of rising NPAs for the better part of last decade are showing signs of sustainability, analysts say. Higher recoveries from bad loans and a slowdown in new NPA creation are likely to make profits more durable, they say.

ICICI Bank, Axis Bank and State Bank of India (SBI) have cleaned up their books and are poised to see better days ahead, helped by their wide reach, superior liquidity and better quality loan book. However, challenges with regards to lending to non-banking finance companies and exposures to debt-laden companies such as IL&FS could play spoilers, analysts say.

“These banks are poised to gain double benefits — one from their shift towards a better quality loan book, which will improve asset quality, and second, from the higher recoveries and provision write backs that will help profit and loss accounts directly,” said Darpin Shah, an analyst at HDFC Securities.

Shah prefers private sector lenders ICICI Bank and Axis Bank over state-owned SBI. “ICICI is relatively cheaper because it has a well-diversified group with access to a gamut of financial products still not factored in by its valuation. Axis Bank too is better placed now with the entry of a new CEO who has proven his execution skills and is adept at using technology for the benefit of the organisation,” he said.

Last week, Axis Bank’s second quarter net profit increased to Rs 790 crore from Rs 432 crore from a year ago. More importantly, slippages declined to Rs 2,777 crore — down 69% year-on-year indicating an improvement in credit quality for the private sector lender.

Similarly, ICICI Bank swung back to a profit after a historic loss in the quarter ended June 2018, led by strong loans growth even as uncertainty over the future CEO ended during the quarter. Gross additions to NPAs at Rs 3,117 crore was the slowest addition in NPAs in 12 quarters and provision coverage ratio improved to 69.4% from 66.1% at the end of June. ICICI’s price to book has improved to 2.11 from 1.93 three years ago, while Axis Bank’s ratio is coming back to its 2.47 peak three years ago at 2.43 currently, indicating renewed investor interest.

Only SBI’s price to book has hovered around 1.24 currently down from 1.38 three years ago. Purvesh Shelatkar, senior vicepresident at Centrum Broking, said better macro-economic prospects and favourable court order for power companies have also improved the prospects for large corporate lenders. “We are seeing a revival in sectors like steel and textile. The other large chunk of nonperforming assets from power are also on the mend after the Supreme Court order allowed power producers to renegotiate their agreements.

All these arguers well for these large lenders. However, there are still some problems lurking with regards to lending to NBFCs and stressed companies like IL&FS,” Shelatkar said. Late last month, the Supreme Court allowed three power projects run by Adani Power, Tata Power and Essar Power to renegotiate their power purchase agreements (PPAs) to reflect the higher cost of imported coal.

Power discoms in Maharashtra, Rajasthan, Punjab and Haryana have signed PPAs with Adani Power, Tata Power and Essar Steel. However, the pressure on stateowned banks to lend to NBFCs could pose problems as these lenders are known to accumulate bad assets which private sector lenders avoid. On Monday, SBI said it had swung to a profit after three consecutive quarters of losses led by growth in interest income and lower provisions.

Analysts though point out that the bank has not made the mandatory 100% provision for a large loan to Essar Steel and taken a whopping one-time gain of Rs 1,087 crore from the sale of investments in its general insurance business and transfer of the merchant banking business to a subsidiary.

Exposure to IL&FS and bailouts of NBFCs will also weigh on the bank’s valuations. However, the recovery of credit cycle and lower slippages from the corporate pool have enthused some analysts. “We expect slippages to moderate further in 2HFY19, while the resolution of stressed power assets remains an important event to watch for in the near term (66% of power assets are rated A- or above). We increase our FY19 projections by 11%, while our FY20 earnings estimates stand largely unchanged – we expect RoA/RoE to improve to 0.6%/11.4% by FY20,” said Motilal Oswal in a note.

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