27 july 2020 sector update banks and nbfcs nbfcs - rbi...rbi flags downside risks in its latest...

27 July 2020 Sector Update

Banks and NBFCs

HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters

RBI flags downside risks In its latest financial stability report (FSR), the RBI has indicated that while

the Indian financial system remains stable, the overall economy and economic

prospects face significant downside risks. As a part of its macroeconomic

shock testing, the RBI indicated that, under very severe stress, SCB’s GNPAs

could rise—from 8.5% at present—to 14.7% in FY21E and systemic CRAR

could fall 300bps to 11.8%. The results of the RBI’s credit risk analysis are

more extreme, wherein, under a 3 SD shock, SCB’s GNPAs could rise to 17.8%

and systemic CRAR could fall ~550bps to 9.3%. The FSR has also hinted at a

disconnect between financial market optimism and the weakening of the real

economy, with sudden and sporadic risk-on-risk-off shifts in sentiment. On

the moratorium front, the FSR has indicated that as ~50% of SCBs’ portfolios

were under the moratorium as at April 2020, and that the impact is still

uncertain.

In our report (Down Cycle Stress Testing), we analysed the impact of

potential asset quality outcomes on FY21E earnings under four scenarios.

While our analysis is not comparable with the one presented in the FSR, due

to differences in approach and underlying assumptions, the results in the FSR

suggest a greater downside than that suggested by our scenario analysis. In

this environment, we continue to prefer large private sector banks with more

than adequate capital and strong liability franchises.

Stress test impact on banks: SCBs witnessed an 80bps decline (vs. 1HFY20)

in GNPAs to 8.5% as at FY20. While PSU banks’ GNPAs dipped 140bps to

11.3%, private banks’ GNPAs saw a 30bps rise to 4.2% (disproportionately

impacted by the sharp rise at YES, we believe). SCBs saw a 390bps

improvement in PCR to 65.4%. Private banks had a PCR of 67.5%. CRAR for

the sector was 14.8%, and private banks were better placed at 16.7%, vs. PSU

banks at 13.1%. The RBI’s FSR broadly speaks of two types of tests: (1)

macroeconomic stress tests, and (2) single-factor sensitivity analysis.

The RBI’s macro-economic stress testing for the base case and three adverse

scenarios indicates the following: (1) SCBs’ GNPAs could increase to 12.5%

by FY21E in the base case scenario and 14.7% under very severe stress; (2)

private/ PSU banks’ GNPAs could rise to 7.3/15.2% by FY21E in the base

case scenario and 8.7/16.3% under very severe stress; (3) CRAR for the sector

could fall by 150bps to 13.3% in FY21E in the base case scenario and by

300bps to 11.8% under very severe stress.

The RBI’s FSR speaks of various single-factor sensitivity analyses. As part

of the credit risk analysis, under a very severe shock of 3 SD, systemic

GNPAs would rise to 17.8%, and systemic CRAR would dip to 9.3%.

Systemic capital impairment could be 41.8%. Under a very severe shock, 23

banks, which account for 64.5% of SCB’s assets, might not be able to meet

the regulatory CRAR requirement.

Wholesale credit growth and rating trends: Over FY20, public sector banks

saw a sharp contraction in credit to borrowers across rating grades, except

AA and above and non-PSU borrowers. In contrast, private banks saw

positive credit growth across rating grades and borrower types (PSU and

non-PSU). Interestingly, this indicates a lower risk aversion amongst private

banks.

RBI’s macro stress-test assumption

GNPA (%) projections under macro

stress-tests

Systemic CRAR (%) projection under

macro stress-tests

Source: RBI, HSIE Research

Darpin Shah

[email protected]

+91-22-6171-7328

Aakash Dattani

[email protected]

+91-22-6171-7337

Punit Bahlani

[email protected]

+91-22-6171-7354

-4.4

10.9

4.1

10.1 10.2

-0.5

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13.911.8 12.1

4.2

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Baseline Medium stress

Severe stress Very severe stress

11.3

4.2 2.3

8.5

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FY20 Baseline

Medium stress Severe stress

14.613.3 12.7 12.1 11.8

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https://www.hdfcsec.com/hsl.docs/Banks%20-%20Down%20cycle%20stress%20testing%20-%20HSIE-202006252149538650870.pdf

mailto:[email protected]

Page | 2

Banks and NBFCs : Sector Update

Overall, PSU borrowers were the recipients of much of incremental credit over

FY20, and borrowers rated AA and above predominantly accessed credit in

2HFY20.

The long-term rating momentum (quarterly upgrades vs. downgrades) indicated

that adverse rating downgrades that started in 3QFY19 persisted over FY20 and

into 1QFY21. A sample study of borrowers downgraded over 1HFY20 and

tracked by the RBI revealed that the incremental delinquency rate rose sharply in

3QFY20. This indicates worsening credit quality even before the pandemic.

While the proportion of standard assets rated AA and above has increased, the

rating distribution of SMA 1 & 2 indicates that AA and above is the largest rating

grade.

NBFC trends: (1) NBFCs’ GNPAs declined during successive quarters until

3QFY20; however, they surged in 4QFY20, despite the standstill classification

benefit. The CRAR of the sector stood at 19.6% in FY20, slightly down YoY. (2)

Banks and market borrowings account for over 70% of NBFCs’ funding mix. The

share of long-term market debt was 40.8% as at 3QFY20, and that of bank

borrowings was 28.9%. The RBI’s FSR expressed concern on the declining share

of market funding for NBFCs as it has the potential to accentuate liquidity risks

for both NBFCs and the financial system. Smaller/mid-sized and AA or lower

lower-rated/unrated NBFCs have been shunned by both banks and markets,

accentuating the liquidity tensions faced by NBFCs, which was also reflected in

the lacklustre response to the TLTRO 2.0.

Stress test impact on NBFCs: System-level stress tests for the NBFC sector’s

aggregate credit risk under three scenarios indicate that systemic CRAR could

decline by 440bps to 15.2%. Stress test results on individual NBFCs indicate that

up to 19.5% of companies may not be able to meet regulatory CRAR

requirements.

Early system-level moratorium trends: The RBI’s FSR indicates that, as at April

2020, 50% of loans by value (55.1% by number) were under moratorium. PSU

banks had a higher proportion of their portfolio under moratorium (67.9% by

value). 31.1% of private banks’ portfolio was under moratorium. The MSME

sector had the highest proportion of loans under moratorium at 65.3%, and the

corporate sector had the lowest proportion of loans under moratorium at 58%.

Interestingly, while 58% of PSU banks’ corporate portfolio was under

moratorium, this figure was just 19.6% for private banks. Similarly, while 80% of

PSU banks’ individual loan portfolio was under moratorium, for private banks, it

was just 33.6%.

Moratorium stats for the sector as at April, 2020

Moratorium details

(%)

Corporate loans MSME loans Individual loans Other loans Total

by no. of

customers by value

by no. of

customers by value

by no. of

customers by value

by no. of

customers by value

by no. of

customers by value

PSU banks 28.8 58 73.9 81.5 80.3 80 48.8 63.7 66.6 67.9

Private banks 21.6 19.6 20.9 42.5 41.8 33.6 39.1 40.9 49.2 31.1

Foreign banks 32.6 7.7 73.3 50.4 8.4 21.1 75.8 4.8 21.4 11.5

Small finance banks 78.8 43.7 90.5 52.3 90.9 73.2 64.6 12.3 84.7 62.6

Urban co-operative

banks 63.4 69.3 66.5 65.5 56.8 62 35.6 59.2 56.5 64.5

NBFCs 39.7 56.2 60.7 61.1 32.5 45.9 37.3 41.4 29 49

SCBs 24.7 39.1 43.1 65.3 52.1 56.2 45.7 55.7 55.1 50

System 30.8 41.9 45.8 65 50.4 55.3 45.7 54.6 48.6 50.1

Page | 3


GNPA (%) trends for the sector PCR (%) trends for the sector

Source: RBI, HSIE Research Source: RBI, HSIE Research

Systemic quarterly slippage (%) trends CRAR (%) trends for the sector


Sector-wise GNPAs and stressed advances Industry-wise GNPAs


10.0

12.0

14.0

16.0

18.0

20.0

FY

16

1H

FY

17

FY

17

1H

FY

18

FY

18

1H

FY

18

FY

19

1H

FY

20

FY

20

PSU banks Private banks

Foreign banks SCBs

-

5.0

10.0

15.0

20.0

25.0

FY

16

1H

FY

17

FY

17

1H

FY

18

FY

18

1H

FY

18

FY

19

1H

FY

20

FY

20


Foreign banks SCBs

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY

18

1H

FY

18

FY

19

1H

FY

20

FY

20


Foreign banks SCBs

Page | 4


RBI’s macro stress-test assumptions SCBs’ GNPA (%) projections under macro stress-tests


Systemic CRAR (%) projection under macro stress-

tests

Bank-wise distribution of CRAR under macro-stress tests


Credit-risk analysis results Wholesale credit outstanding by borrower

categories/lender groups


11.3

4.2 2.3

8.5

15.2

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FY20 Baseline Medium stress Severe stress Very severe stress

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Baseline Medium stress Severe stress Very severe stress

14.6

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0

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FY20 Baseline Medium

stress

Severe

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Very severe

stress

34

2

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7

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43

5

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Less

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12% to

13%

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14%

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and

higher

Baseline Medium stress Severe stress Very severe stress

14.612.7

10.99.3

12.510.6

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41.8

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14.717.8

0

5

10

15

20

25

30

35

40

45

Baseline Shock 1 Shock 2 Shock 3

CRAR Tier 1 capital ratio Losses as a % of capital GNPAs

Page | 5


Wholesale credit growth (%) over the last 3 years

across borrower categories

Long-term ratings movement and number of borrowers


Incremental GNPA ratio of the cohort of downgraded

companies


Ratings distribution of standard portfolios of SCBs

(%) FY18 FY19 1QFY20 2QFY20 3QFY20 FY20

AA and above rated 39.04 45.27 45.38 46.11 45.39 47.46

Investment grade till rating grade A 28.55 27.41 27.23 26.49 27.17 26.04

Sub-investment grade 8.77 6.78 7.22 6.55 6.92 7.34

Unrated 23.64 20.54 20.17 20.85 20.52 19.16


Ratings distribution of SMA 1/2 of SCBs

(%) FY18 FY19 1QFY20 2QFY20 3QFY20 FY20

AA and above rated 41.89 20.72 15.65 12.79 29.38 40.44

Investment grade till rating grade A 26.04 24.58 17.12 24.32 20.82 13.65

Sub-investment grade 18.54 35.29 39.84 35.21 27.05 17.54

Unrated 12.92 19.41 27.39 27.69 22.76 28.37

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Page | 6


Asset quality trends for NBFCs


Peer set comparison

MCap

(Rs

bn)

CMP

(Rs) Rating

TP

(Rs)

ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)

FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E

AUBANK# 240 790 ADD 724 135 148 175 35.0 35.1 29.8 5.74 5.25 4.44 18.6 14.5 14.8 1.61 1.41 1.47

AXSB# 1,257 446 BUY 565 268 291 344 74.1 13.7 9.8 1.60 1.46 1.23 2.1 9.8 12.2 0.19 0.93 1.18

CUBK 93 126 BUY 172 61 65 77 19.5 18.3 12.3 2.05 1.93 1.64 9.4 9.2 12.3 1.00 1.00 1.38

DCBB 25 80 ADD 105 93 95 114 7.4 8.2 6.4 0.86 0.85 0.70 10.3 8.5 9.9 0.91 0.76 0.89

FB 115 58 BUY 64 65 64 75 7.4 9.6 7.4 0.89 0.89 0.77 11.1 8.0 9.6 0.91 0.64 0.75

IIB 370 522 ADD 601 459 512 575 8.2 12.6 8.9 1.14 1.02 0.91 14.7 8.1 10.2 1.51 0.93 1.21

KMB# 2,670 1,350 ADD 1,331 232 292 330 34.6 34.4 29.3 4.64 3.75 3.21 13.9 11.8 11.1 1.78 1.68 1.75

KVB 24 30 REDUCE 35 60 51 62 10.3 7.5 5.3 0.51 0.59 0.49 3.6 4.8 6.7 0.34 0.46 0.61

RBK 93 183 REDUCE 148 185 196 215 18.4 19.1 11.3 0.99 0.93 0.85 5.6 4.5 7.2 0.60 0.53 0.84

SBIN# 1,713 192 BUY 277 175 167 207 4.9 6.9 3.4 0.45 0.49 0.38 6.4 4.4 8.2 0.38 0.26 0.48

CIFC 174 213 BUY 235 84 92 112 17.6 15.6 12.8 2.52 2.32 1.89 13.8 12.9 13.9 1.63 1.73 1.98

SHTF 160 707 ADD 861 530 568 754 6.4 7.3 5.8 1.33 1.24 0.94 14.8 11.5 13.0 2.28 1.90 2.28

INDOSTAR 36 265 REDUCE 266 226 247 276 -7.5 31.2 16.7 1.17 1.07 0.96 - 11.4 4.0 5.2 - 2.96 1.15 2.00

LICHF 138 273 REDUCE 272 294 269 298 5.7 8.6 5.9 0.93 1.01 0.92 13.9 8.5 11.3 1.15 0.72 0.99

REPCO 8 132 ADD 215 246 258 303 2.8 3.3 3.3 0.54 0.51 0.44 17.7 13.1 11.5 2.55 2.05 1.96

Source: Banks, HSIE Research, #Adjusted for subsidiaries

6.4

3.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY

15

FY

16

FY

17

FY

18

FY

19

1H

FY

20

9M

FY

20

FY

20

GNPA (%) NNPA (%) PCR (%, RHS)

Page | 7


Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: >10% Downside return potential

Disclosure: We, Darpin Shah, MBA, Aakash Dattani, ACA & Punit Bahlani, ACA, authors and the names subscribed to this report, hereby certify that all of the views

expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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27 july 2020 sector update banks and nbfcs nbfcs - rbi...rbi flags downside risks in its latest...

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