Tuesday, January 10, 2012
Indian Banking Sector Outlook - 2012
Q: How much are you expecting the bad loan problem, in the aggregate, to grow by for the banking sector in the next 15 months, say up until March 31 FY13?
Agrawal: Our expectation is that we will now start to see reversal in the stable gross non-performing asset (NPA) position that we have been seeing for the banking sector over the past few years. We have already seen in the first six months that the gross NPAs have already increased.
They currently are at about 2.8% of the overall advances. Our expectation is that they should be around 3% by March 12. They should cross a little above 3% in March 13, should the economic environment remain a little more stable and we are expecting a growth of about 7-7.5% next year.
However, the vulnerabilities in the external environment still remain. Domestic economy also remains vulnerable to the lack of investment and high interest rates. Should that happen, it is likely that that figure can be higher. Our estimate at this stage is that March 12 the overall gross NPAs should be near Rs 1,50,000 crore.
Q: Do you have a number for March 13?
Agrawal: March 13, the scenario is still evolving. Our expectation is that they should remain stable at about 3-3.2%, should we see economic environment and growth and interest rate easing as is expected to happen. The situation can worsen and the numbers can be higher, if the growth trails down maybe below 7%, somewhere in 6.5-7% range.
Q: We have been talking about the stressed sectors- airline space or even the entire power space. Have you worked out any kind of numbers of how much the lender's exposure is potentially at risk in each of these individual sectors? Which banks perhaps are vulnerable?
Agrawal: On the power sector, we released a detailed study a couple of months ago. Should reforms do not happen over the next 12-18 months, our expectation is that nearly Rs 56,000 crore of loans that lenders - banks, specialised financial institutions and the infrastructure finance companies- have given. That represents about 12% of the overall loans that lenders have given to this sector. They are potentially at risk.
We have seen that some steps towards reforms have started to take place. Indeed two-three months is a short time for us to judge the efficacy of these reforms. But I think it is important that these reforms gather pace.
We see far higher progress on containing the distribution losses. We see far higher progress on charging of electricity rates which are consistent with the economic cost of supply. Should these two basic reforms do not happen, we are likely to see the exposure of lenders to be at risk.
In the aviation sector, the overall exposure of the banking system is estimated at about Rs 40,000-50,000. We are seeing that except one or two exceptions most of the airlines are making losses. High fuel prices are expected to continue. Therefore, we do not see the stress going away from the aviation sector either.
Q: What is your estimate of the worst impacted banks? Which are you singling out for maximum pressure from the NPL front?
Mehta: As a segment, PSU banks are looking more vulnerable. Within that, SBI has been named in case of lot of accounts as being a prime lender. Along with other midcap banks, specifically could be Bank of India , Union Bank of India . These three banks are more vulnerable as compared to the overall segment.
Amongst the private banks, I think Axis and then to an extent even ICICI Bank , given their high exposure to infra and power segment look a bit weak.
Q: In your estimate, in the second half of FY12, as well as in the first half of FY13, what will be the impact on the P&L? Would you see fall in net interest margins or would you see fall in profitability because of the pressure of higher provisioning? What will be the parameters that will be impacted?
Mehta: As far as margins are concerned, margins would typically correct by 10-20 bps for lot of banks in the second half, not just because of the higher NPAs but also because we think that tight liquidity would come into picture as far as the Q4 margins are concerned.
In terms of profitability, we think that provisioning will remain elevated even for PSU banks, given the fact that their reported slippages for Q3 will be lower than Q2, because Q2 had the one time impact of transitioning to the automated NPL recognition system. So, we think that provisioning would remain high in the second half. Overall, profitability would remain under pressure in the second half.
Q: How worried would you be about the credit growth of banks in this year? Do you expect any kind of slippage, but more importantly in FY13 as well?
Mehta: Ofcourse. We have already seen that the YoY growth run-rate in credit has come off from about 20% odd to 17%. Slowly it is catching up with the overall macro economic trend. We would see further decelerating to 15-16% by the end of the year. I think it could remain there for a while till we see a further deterioration in the underlying economy. I think a 15-16% credit growth rate, even in the first half of FY13, is a possibility.
Q: Can you name banks that you are particularly worried about? In the previous big slowdown, 1997-2003, we also saw a huge fall in interest rates. At that time policy rates fell from over 12% to under 5%. That gave a lot of treasury income and provision write-back for banks. That perhaps helped provisioning to some extent. Is any such gain possible in the FY13 period?
Agrawal: Yes. I would not be able to specifically name any banks here. But I will give you some broad trends. I think the banks where we will starting to see weakness on the NPL front are where higher exposure to corporate loans are there, specifically the small and medium enterprises and the agricultural loans. We will see that those are the ones which will see higher slippages, primarily because of the economic environment as well as the high interest rates.
We released a study recently, our research team, which said that interest coverage of Indian corporate sector is near its five year low. That is largely going to impact the public sector banks.
The private sector banks will see some pressure coming from retail loans. We expect that some weakening will start to happen in commercial vehicles and construction equipment kind of segments. If it starts to spill over to infrastructure in a manner, I think banks which will have those exposures will be vulnerable.
Next year, we expect that interest rates will fall off. Clearly, we do not see them to fall off as dramatically as you have said in the period that you referred to. Clearly, there are also structural changes that have happened in the economy, interest rate environment structure and the ability of corporate sector in India in terms of ability to withstand some of these shocks.
Interest rates coming down hopefully will provide enough cushions to be able to absorb the pressure of higher provisioning and lower interest margins. That would be for next year.