Q2 Earnings: Mid-Sized Lenders Push Up Private Bank Bad Loans To Four-Year High

After a brief period of stability, India’s private lenders have once again seen an uptick in bad loans during the July-September quarter. While the first round of asset quality pain hit the larger lenders, it is now mid-sized banks which are seeing a deterioration in their loan portfolios.According to data collated by BloombergQuint, for 13 out of 15 private sector lenders which have declared their results for the quarter ended September, bad loans have inched higher and credit growth has slowed. Profitability during the quarter was lower but mostly due to a one-time tax hit as banks chose to move to the new corporate tax regime.For these 13 banks, gross non-performing assets rose to Rs 1.31 lakh crore as on September 2019, compared with Rs 1.24 lakh crore a quarter ago. Bad loans across private lenders have risen for two consecutive quarters after five quarters of stability. Net NPAs rose to nearly Rs 49,000 crore at the end of the second quarter from Rs 46,695 crore in the first quarter.BloombergQuint uses data starting the December 2015 quarter, which reflects the start of the asset quality review cycle..Among the top banks, HDFC Bank Ltd., the largest private lender, reported a marginal increase in bad loans but its gross NPA ratio remained in check.ICICI Bank and Axis Bank, which had seen a large build-up of bad loans after the 2015 asset quality review, continued to repair their balance sheets slowly and saw a decline in the absolute level of bad loans on a quarter-on-quarter basis.Still, these lenders remain cautious on emerging stress from segments like small business lending. According to Amitabh Chaudhry, chief executive officer of Axis Bank Ltd., smaller corporate borrowers are the first to be hit as stress builds up for larger companies. Around Rs 900 crore worth SME loans slipped into NPA category for Axis Bank during the quarter ended September, he said.The pressure shifted to mid-size banks.Yes Bank Ltd. saw the biggest quarter-on-quarter jump in bad loans, adding close to Rs 5,000 crore worth bad loans in the three-month period. As a ratio of gross advances, Yes Bank’s bad loans rose to 7.39 percent from 5 percent in the previous quarter. The rise in slippages was due to certain “unbudgeted and unexpected” events in accounts like CG Power, Altico Capital, Cafe Coffee Day and Cox & Kings, the bank’s Chief Executive Officer Ravneet Gill said in a conference call on Friday. The bank revised its credit cost guidance to 225-250 basis points, from 125 basis points earlier, citing these cases.Smaller peer RBL Bank Ltd., saw a nearly doubling of bad loans from Rs 789 crore to Rs 1,539 crore quarter-on-quarter. Vishwavir Ahuja, CEO of the bank, blamed the slowing economic growth and the corporate credit environment for the deterioration in the bank’s loan book. The stress is concentrated on a few corporate accounts, which would be adjusted during this financial year, Ahuja said..The bad loan situation has actually improved for large private banks during the September quarter, a trend which has continued for nearly a year, said Lalitabh Shrivastawa, banking analyst at Sharekhan. “However, we are seeing some pressure building up in the mid-sized banks, where even one or two slippages hurt quarterly performance. Owing to their size, the impact of one or two chunky slippages is optically more visible and also more difficult to absorb,” Shrivastawa said.Another banking analyst with a foreign brokerage, speaking on condition of anonymity, said that while this quarter has largely been benign for private banks, unless the issues with India’s financial sector are resolved quickly, there could be some tough times during the rest of the year..Muted Loan GrowthWith the economy slowing and credit quality concerns persisting, loan growth at private banks remained muted. Retail lending continued to see strong growth across most of these lenders in contrast to modest growth in corporate credit.Credit growth for 11 of the 15 private banks that have reported earnings was at 14.4 percent year-on-year in the July-September period, as compared with 14 percent in the preceding quarter. However, this is slower than the 15-20 percent loan growth that private sector banks have been reporting in the last two years.Two of the 13 banks that have reported earnings are yet to put out investor presentations and their precise loan book data is not available. As such, they have been excluded from the credit growth calculations.To be sure, private banks are still growing their loan books at a faster pace than the 8 percent credit growth seen across the system.HDFC Bank reported a strong growth of 19.5 percent in advances. The bank’s domestic retail loans grew 14.7 percent and wholesale loans surged 27.9 percent.In case of ICICI Bank, total advances rose 12.6 percent year-on-year, as the bank chose to bring down its international lending book. Domestic loans for the bank rose by 16.4 percent, driven by retail loans in the housing and unsecured loan segments. ICICI Bank’s domestic corporate lending portfolio grew by 7 percent, after adjusting for any stressed loans.Axis Bank reported a 14.3 percent year-on-year growth on its loan book.Yes Bank saw its loan book shrink by more than 6 percent during the quarter, as the bank tried to conserve capital. While speaking to analysts after the results, the bank said it has been actively bringing down its exposures in the NBFC, housing finance and real estate sectors..Smaller lenders like Karur Vysya Bank Ltd. and Karnataka Bank Ltd. have also seen lower credit growth during the second quarter, reporting 2.6 percent and 7 percent year-on-year growth respectively.Dhananjay Sinha, head strategist and chief economist at IDFC Securities, expects a “not-so-very strong” year for the private banking sector in the quarters ahead.“We have seen credit growth decelerating for private banks and the overall system. This has also been accompanied by rising credit cost, which is reflective of the overall environment today,” Sinha said, adding that banks will start seeing the impact of benchmarking of retail loans to the repo rate in the coming quarters, which will result in lower yields. “Unless credit growth comes back in a big way, this year looks like a tough one for private banks,” Sinha said..Profits Impacted By Tax AdjustmentProfitability for private sector banks fell by nearly 5 percent year-on-year during the second quarter, after Axis Bank and Yes Bank reported losses. Both lenders declared a one-time adjustment due to deferred tax liabilities during the quarter.Because of the recently announced corporate tax rate cut, the value of future relief through deferred tax assets will also fall proportionate to the tax reduction. As a result, these banks wrote down the net deferred tax asset pertaining to earlier years.Cumulative net profit for the 13 banks which have reported results came in at Rs 9,518 crore, as compared with Rs 9,979 crore a year ago. The largest contributor to the net profits of private banks was HDFC Bank, which reported a profit after tax of Rs 6,345 crore during the September quarter.Shrivastawa of Sharekhan said that the tax issues are a one-time event and should not unduly worry investors. In fact, on a profit-before-tax basis, private banks have performed better than expected, he said.

Q2 Earnings: Mid-Sized Lenders Push Up Private Bank Bad Loans To Four-Year High

With the economy slowing and credit quality concerns persisting, loan growth at private banks remained muted.

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