The January-March quarter of financial year 2018-19 (FY19) is expected to bring in some stability to the troubled banking sector, reeling under mounting bad loans and liquidity crunch, as the latter has improved along with the Reserve Bank of India (RBI) cutting rate in the February and April 2019 policy meeting by 25 bps each. RBI has been regularly injecting liquidity in the system and even Non-Banking Financial Companies (NBFCs) have also got enough line of credit to do business. The series of Non-Convertible Debentures (NCDs) and Commercial Papers (CPs) raised by NBFC exhibits the improved liquidity in the systems.
Credit Growth has been fairly strong during the quarter approaching 14 per cent, similar to Q3FY19, as per the latest RBI data. The growth rate in Q2FY19 and Q1FY19 was approximately 12 per cent. As per the RBI’s sector credit growth data, retail loans continue to be the growth driver, growing by 16-17 per cent during the quarter. The share of retail credit has been continuously going up, standing at 25.9 per cent at the end of February 2019, a 70 bps rise over FY18 end. On the contrary, the share of credit to Industry has been going south, down by 250 bps at 33.2 per cent, over the same period.
Auto sales, both private vehicles (PV) and commercial vehicles (CV), has seen major slowdown during the quarter and NBFC operating in the segment might see some slow down in the disbursements. However, banks with significant retail operations do have a cost advantage and hence we don’t expect them to have lost the opportunity. Some moderation in the retail segment is likely to have been compensated by the pickup in the large corporates and refinancing opportunities.
Stable Asset quality: IL&FS was a big hangover for banks in the previous quarter and kept investors worried about the account, as they feared that banks will have to take huge provisions on account of it. While we do expect banks to take an additional hit on account of it, there is an expectation of some recovery in few large National Company Law Tribunal (NCLT) related accounts which got resolved during the quarter and hence we don’t expect a significant rise in credit cost. On the contrary, we expect credit cost for large banks to moderate during the quarter.
Private banks are still the preferred play at this juncture: Additional capital infusion by the government might help in meeting the regulatory norms or cleaning up the book but growth capital still is needed for public sector banks (PSBs) and hence there is high dilution expected in coming quarters. As a result, we don’t expect investors to chase PSU at this level. While consumption has seen some slow down during the quarter, which is visible from the auto numbers, demand pick-up will support banks with a strong capital base to propel growth better than others.
Stock Picks:
- HDFC Bank - We remain bullish on the stock because of its stable asset quality and high capital adequacy.
- ICICI Bank - Positive on the stock as it is still undervalued despite the recent rally.
- Axis Bank- Has seen quite a sharp rally in the last two quarters. We feel it’s time for the stock to consolidate now.
- In the pecking order, our preference remains HDFC Bank, ICICI Bank and IndusInd Bank.
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The author is an analyst tracking the banking sector with SMC Global. Views expressed are his own