OUTLOOK ON INDIAN BANKING SECTOR
The banking sector has been the backbone of the economy, where the impact on one reflects on the other as well. When the economy is in the progressive phase, lending and borrowing activities increase significantly and this in turn leads to healthy growth in banks. While the economy passes through a rough, the defaults rise and this leads to an increase in bad assets (bad loans). For the country to achieve the USD 5 trillion economy target within the next five years, while also considering the various challenges due to lockdowns and economic slowdown, credit from banks must grow close to 12% every year in order to at least aim for a USD 5 trillion economy figure by 2024. At the same time, the Indian banking segment has remained resilient enough, growing consistently through multiple economic cycles in order to capitalize on every opportunity.
The past few months have been eventful from a banking sector perspective as many important announcements and developments have taken place with the view of enabling a faster recovery in the sector. Key events include budgetary announcement of formation of bad bank in order to reduce NPA burden of large banks, formation of Development Financial Institution (DFI) to help infrastructural lending, privatisation of PSU banks and the Supreme Court’s order to subdue the asset classification norms, and seeking complete interest waiver and extension of moratorium.
Popular Article: Quick tips for financial planning in 2021
According to Fitch Ratings, the second wave of Covid-19 infections in India has increased the risk of its delicate economic recovery and its banking sector. A mediocre growth environment is already expected for the banking sector in India with the rise in Covid infections. It has been observed that 80% of the new infections are in the states which accounts for around 45% of banking sector loan, where anymore disruption in the economic activity can pose a threat for the banking sector. This situation arises amidst the times when there have been many questions regarding the asset quality of the banks, as the impact of the first lockdown on the financials of the banks is yet to be realized. Although it is expected that the second wave will have a lesser impact as compared to the initial wave on the assessment of the operating environment in the banking sector, with better preparedness this time with digital advancement in the banking functionalities, and higher provisioning factoring the rise in NPAs beforehand which though would impact the profitability.
The downside risks that could surface in the next quarters would be:
- The ratio of gross NPA could rise from 7.5% in Sept 2020, to 14.8% by Sept 2021 in a severe stress scenario, while even under the baseline scenario it may rise to 13.5%.
- The RBI fears that the data on fresh loan defaults reported by banks does not reflect the true state of the banks’ portfolios.
- Due to prolonged uncertainty with the second wave of Covid, current local lockdowns and supply chain issues might affect the vulnerable small banks, NBFCs and their vulnerable customers from small borrowers to small and medium businesses.
- Bank credit growth remains elusive and slowest in the last 4 years, where the credit to businesses and individual slowed to 4.9% in FY21 from 6.8% in FY20.
- The payment rejection rates are back to January levels and are further expected to rise this month, with a forecast that the collection ratios might get hit by 5-10% due to the increase in the covid-19 cases in the country.
But despite the downside risks prevailing, the banking sector should manage to stay afloat by minimizing the dent to the growth prospects with the latest developments in the banking system and regular monitoring of RBI and accommodative measures taken to tackle the situation. Most banks have steadily increased the number of provisions to counter any possible COVID shock and have ramped up their digital capabilities to reach out to the customers reducing the risk and uncertainty in the physical functionalities. Banks have also addressed the stress on the mid and large corporate book, at least a significant part of it, either by pushing them to NCLT or using the one-time restructuring facility announced by the RBI last year. While, the latest measures taken today by RBI in terms of allowing Covid Loan book, liquidity measures for the healthcare system and the public in general, MFIs loan restructuring, and further extension of one-time restructuring facility for small borrowers, including individuals and MSMEs are steps taken in the right direction to keep in check the downside risks for the financial sector.
Overall, the banking sector though facing hiccups in the next couple of quarters, are resilient enough to stay afloat in the prevailing environment of uncertainties, and well poised for progressive growth over a longer term.
Market Analysis on Banking Sector
India’s largest private sector lender HDFC Bank today reported an 18.2 percent year-on-year rise in net profit to Rs 8,186.51 crore for the quarter ended March. The lender reported a net interest income of Rs 17,120.2 crore, up 12.6 percent from a year-ago quarter.
Analysts had expected the bank to report a 23 percent year-on-year rise in net profit to Rs. 8,550.3 crore and a near 12 percent rise in net interest income to Rs 17,000 crore.
For the quarter, the lender’s gross non-performing loans ratio stood at 1.32 percent as against 1.38 percent on a proforma basis in the previous quarter.
Loan Book grew 14% YOY riding the domestic corporate book growth. While the Mid corporate and SME sector saw improved demand, large corporates showed deleveraging tendencies. Cash flows into SME accounts have been improving from December 2020.
Cheque bounce rates have deteriorated in April compared to March, however, there has been some pressure from Maharashtra, MP, Telangana and Punjab.
HDFC expects to build on its card portfolio from newly acquired liability relationships (2mn customers added during the quarter) once forbearance is lifted.
It has partnered with tech companies for faster migration, as well as the independent audit by RBI is in its final stages which looks like good news for the bank.
Uncertain times put a premium on resilience, a strong balance sheet and likely higher residual capital than most keeps HDFC in a good position and makes it one of the best bets in the current markets.
IDFC First Bank has raised Rs 3,000 crore through QIP in which global marquee investors like BNP Paribas and Baillie Gifford participated alongside domestic players such as Bajaj Allianz Life and HDFC Life.
The qualified institutional placement (QIP) closed on Tuesday and the lender issued 52.31 crore fresh equity shares at Rs 57.35 per share. Out of this, 68.33 percent of the allotment was made to foreign investors and 31.67 percent to domestic investors.
The private sector bank also witnessed over 10 per cent yearly growth in its total funded assets at Rs 1,17,803 crore as of March 31, 2021 from Rs 1,07,004 crore a year ago.
Total consumer deposits grew by 43.15 per cent year-on-year to Rs 82,628 crore from Rs 57,719 crore for the period.
Bank’s CASA deposits (current account and savings account) jumped by 122.74 percent to Rs 46,022 crore from Rs 20,661 crore by March 2020. The CASA ratio stood at 51.95 percent by the end of March 2021, up from 31.87 percent by a year ago.
However, the top 20 depositors’ concentration witnessed a decline at 7.76 per cent against 20.26 per cent.
Telecom sector is looking at another potential turnaround as Airtel’s net subscriber additions in the past quarter are the highest. Last week Airtel declared an addition of 13.9 million subscribers mostly in 4G as compared to Jio’s 7.3 million additions. In addition, Airtel has done well to keep its churn ratio to an all-time low level of 1.7%. Retention of Postpaid users is the biggest contributor. Airtel is all set to take on Jio in the FTTH broadband segment and is developing its own 5G open radio access network. A few months delay in Jio’s deal with Google to develop a low-cost Android device has given a window of opportunity for Airtel to capitalize on its subscriber base acquisition from Vodafone Idea.
In its current state, the industry is faced with chronic oversupply. High production cost has led to using subsidies for selling sugar in the international market. Moreover consumption in India has stagnated to 19 kg per capita per year on the back of increased scrutiny for its impact on health and obesity. To counter these issues, the mills have begun an online campaign with the help of nutritionists, medical practitioners and health experts to deliver webinars and conduct workshops to boost domestic demand. This will cut overseas sales and save the government money by reducing export subsidies.
Starting Nov 1, ICICI will start charging Rs.50 per cash deposit to its customers on all non-working days and outside of the working hours on other days. This comes on the back of Axis bank doing the same from August 1. This comes as a major step towards pushing digitization of banking and discouraging physical presence for the customers. This will have a huge impact in reducing fixed costs for the banking sector as they can reduce the number of Brick and Mortar branches along with the ATMs. Charges after certain limits have also been introduced by PSBs and charges on Locker visits post a certain number is also in the process of implementation.
Quarterly Results (Auto Sector):
The Indian Auto sector has seen signs of recovery with sales numbers for passenger vehicles have been positive for most of the major players. There is still some weakness when viewing the commercial vehicles sales figures.
Revenues for Maruti have been up 10% yoy and profits up by 1% yoy. The onset of festive season is boding well for the Auto players as Diwali has traditionally been a hot time for car sales in India.
Most of the companies including Maruti Suzuki seem to have missed the demand estimates and it still remains to be seen if they can convert this pent up demand into regularizing revenue streams.
India’s Foreign Exchange reserves touched an all time high of $560.532 billion in the week ended October 23rd. During the reporting week, reserves saw a major increase in the foreign currency assets (FCA) which rose by $5.202 billion. Gold reserves were up by $175 million to $36.860 billion as per RBI.
This is welcome news as there is an increasing pressure on Indian Government to maintain the fiscal deficit in a manageable range. On top of which the increase in government borrowings has been another worrying factor.
The country’s reserve position with IMF has climbed by $27 million and the special drawing rights rose by $8 million. This will provide further scope for the Government to help out with their borrowing woes.
GE Power: Shares of GE Power India Ltd. snapped a six-session losing streak after the company said it will continue to pursue opportunities in a business segment that focuses on reducing sulphur dioxide emissions even as its promoter plans to exit the new-build coal power market globally.
The total flue-gas desulphurisation market (including captive power plant) in India is 225 GW, out of which about 82 GW (Rs 33,000 crore) has been already been ordered till date by majorly central public sector utilities with a few state utilities and IPP (independent power producer),” according to an exchange filing.
GE Power India, it said, to date has been awarded 10 FGD projects, amounting to about 13 gigawatts (representing about 15% market share), which are now in various stages of execution. The balance potential market for FGD in India, which remains to be ordered in the next three to five years, is estimated to be around 143 GW, the filing said.
Pidilite Industries: Pidilite Industries — the manufacturers of the popular Fevicol brand of adhesives — has signed a definitive agreement to acquire the US-based Huntsman Group’s Indian subsidiary for ₹2,100 crore on Thursday.
Huntsman operates a 100% subsidiary in India, Huntsman Advanced Materials Solutions, which directly competes with Fevicol, as it manufactures and sells adhesives, sealants and other products under brands such as Araldite, Araldite Karpenter and Araseal in the country.
Pidilite Industries share price rose 2% in the early trade on Thursday after the company acquired Indian subsidiary of Huntsman Group, namely HAMSPL.
ANT Group: The Chinese giant is likely to pull off the largest initial public offering (IPO) in history, hoping to raise $34.4 billion. If successful, it will overshadow the IPO debut of Saudi Aramco in December 2019, which had raised a then-record $29.4 billion.
The Ant Group provides digital payment services and operates digital finance technology platforms. Ant Financials IPO would value the company at about $315 billion, which will be bigger than the largest bank in the United States – JP Morgan Chase & Co, whose market cap was $296 billion as of October 30, 2020. Ant is set to be larger than payment rival PayPal Holdings Inc., media giant Walt Disney Co. The company’s valuation will be among the largest financial companies in the world like Visa and MasterCard.
Alibaba Group Holding: Alibaba Group Holding Ltd. helped modernize brick-and-mortar retail with consumer data and online services. Now it hopes to do the same for China’s multi trillion-dollar manufacturing arena. Alibaba’s newest line of business offers data analytics and back-end technology to manufacturers so they can customize and fine-tune factories in response to consumer demand.
Alibaba is betting that its years of observing consumer behavior will be useful to the country’s producers. Smaller manufacturers are struggling to adapt to changing consumer needs in a slowing economy. Alibaba’s starting point is apparel but it eventually aims to help more manufacturers parse data, automate logistics and maintain just-in-time inventory, much as it already does for Chinese convenience chains and big-box retailers.