Two things stood out in the year gone by. First, was extension of loan moratoriums and setting aside Covid related provisions in anticipation of delinquencies. Second, ECLGS loans extended by banks backed by sovereign guarantees, though conditional in many ways.
The regulator while drafting the mandatory Covid related provisions for the loans under moratorium, allowed banks to write back in case the loans get salvaged. Q4-2021 could be the quarter witnessing the same.
As we enter the climax, two questions arise –
>> Would there be large scale Covid provision write backs? and
>> What would happen to asset growth of banks in the absence of ECLGS loans?
Banks went into their shells immediately on the announcement of lockdown. They were nudged by the government and RBI to propel the economy. In the 9 months ending December 2020, top 5 private banks extended approximately ₹ 56,000 crs of ECLGS loans This constitutes 28% of the total ECLGS loans disbursed by the banking system; hence significant part of the asset growth can be attributed to the same. Further, these five banks had also created provisions of approx. ₹ 30,000 crs of Covid related provisions in anticipation of delinquencies.
In the last 6 months, Bank NIFTY has grown from 20,500 to 35,600 levels, which is a whopping 75% growth. Market is rejoicing that credit growth is back and stress book looks far lower than anticipated and is well contained. Steep provision buffers created by banks and capital raise would be good enough to take care of exigencies in the coming financial year. Well that’s true !
The eyes would roll back on banks to deliver for the street to perform, since bank stocks constitute over 30% of NIFTY. Listed banks would be under tremendous pressure to prove themselves – market would be unforgiving if banks do not show growth. Q4-2021 probably would be the first litmus test for banks – wherein they would have to prove their mettle by doing loans without any external blessings of GOI and RBI.
The NIMs of banks were also aided by one way steep fall in the interest costs owing to regulatory policies and liquidity infusion. These would taper off with loans getting repriced, albeit with a lag – as pricing of loans is now market linked. For the overall profitability to remain intact, banks may resort to write back of provision covers, as also allowed by the regulator.
With the economy bouncing back, one can imagine that significant part of INR 30,000 crores of provisions can be written back and boast bank’s profitability. This was already visible in case of one large private bank, which has consumed ₹ 1800 crores of Covid provisions in Q3-2021 viz., Covid provisions were reduced to that extent and utilised elsewhere.
Credit growth of banks without ECLGS loans looks tepid in the first 9 months of the financial year. Banks which are able to show good growth in Q4-2021 would be clear winners for the investors. Why not? They are rich in capital and have healthy provision coverage ratios. It’s about time capital is distributed equitably, while some smart banks would retain part of the Covid buffers for future exigencies.
Author Profile
Sumit Kakkar is a seasoned Banker with more than 24 years of experience in Credit and Risk functions. He has worked with leading banks including HDFC Bank, Yes Bank, Deutsche and last served as a Chief Credit Officer with Federal Bank.
Disclaimer: The opinions expressed here are those of the author and does not reflect the views of FrankBanker.com