Ever since the Asset Quality
Review (AQR) mandates have hit the Indian banking space, there has been a
persistent pressure on the monetary health of the economy. This has been
especially true in the current circumstances, when a revitalized economy is
stifled of cash.
With the languishing capital as
well as money markets, the economy has found refuge in bank credit, which is
expanding at an unprecedented rate of 15% (as on December 2018). Perhaps, not
much of a good news since the rate of deposit growth is less than 9%. This
comparative difference is creating immense pressure on systemic liquidity,
measured by a now very volatile weighted call money rate (Indian LIBOR), which
is often higher than the Repo itself.
What this basically means is that
banks are feeling the liquidity jitters as they are the only ones with money at
the moment. Subsequently, the credit to deposit ratio is now fast approaching the
psychological 80 level – a threshold that has never been breached before and
can therefore be considered an all-time high figure.
Even NBFCs, which were taking
over a lot of unmet demand for capital have been hit hard due to market
conditions and unwilling/ unable Schedule Commercial Banks (SCBs) and have seen
their market share adversely impacted. Given these circumstances, the SCBs are
once again at the forefront and the ‘Report on Trend and Progress of Banking in
India’ attempts to see the evolution of this very important component of the
Indian economy. In this Impact Analysis, we assess the operations of the banks
and study their ability to sustain expectations that rest on their
shoulders.
Borrowings: Money at Call & Short Notice
Balances declined by (-) 19.3% in FY18 leading to borrowing duration profile going
downhill
Starting with a bird’s eye view,
the balance sheet of SCBs expanded by 7.6% in FY18 and stood at Rs. 152,533
billion; the growth remained similar to that recorded in the previous year.
Under liabilities, while deposits grew by just 6.1% (as compared to over 10% in
FY17), what surprised was the expansion in Borrowings.
The head saw a growth of 31.4%
and was primarily driven by Foreign Banks (FBs). While most of the money under
this head is borrowed from the RBI under the Liquidity Adjustment Facility
(LAF) and is used to bolster capital positions, FBs may have borrowed from home
bases, where interest rates are much lower. Total borrowings of all SCBs
collectively stood at Rs. 16,823 billion as on FY18. Individually, FBs recorded
a maximum growth of 81% and PSBs recording the minimum growth of just over 17%
in the classification. Incidentally, the share of borrowing to total
liabilities of FBs has now reached almost 15%, a distinction that they now
share with PVBs.
The maturity profile of most of
these borrowings mirrored the market preferences as durations went downhill. Borrowings
with duration of ‘up to 3 years’ now comprise 73.2% of the portfolio as
compared to 64.9%, previous year. This also means that banks want borrowings to
support their short term requirements and maybe compensating the decline in
‘Money at Call & Short Notice Balances’, which declined by (-) 19.3% in
FY18. Here again, the FBs have almost 96.3% of their portfolio in short term
duration with that of Private Banks (PVBs) being more evenly distributed. PSBs
do show increased tendency to play in the short term of the curve as per the
data. The situation has resulted in a continued asset liability mismatch in up
to 1-year category, which needs addressing.
Investments:At Rs. 72 billion, the Held to
Maturity (HTM) portfolio has increased almost 2.5 times in FY18
Investment on the other hand, grew
by 13% as compared to under 9.8%, the previous year. However, the maturity
profile remained pretty much constant with very little variance. We reckon that
since most of the investments are in long duration Government securities, which
are considered safe haven in volatile times - helps keep the status quo. At Rs.
72 billion, the Held to Maturity (HTM) portfolio has increased almost 2.5 times
in FY18 – explaining bank tendencies clearly, strengthening their High Quality
Liquid Assets (HQLA) profile.
Loans
& Advances: PSB share in total
credit outstanding has fallen below the 70% mark for the first time in Indian
banking history
Further assessing the asset side,
the Loans and Advances category recorded an expansion of 7.8% as compared to
under 3% growth, the previous year. The duration profile has been more or less
consistent with the previous year however preference for longer term loans
(over 3 years) is seen in both PSBs and PVBs. With an offtake of nearly 20%,
PVBs have been consistently leading the pack compensating for both PSBs and
FBs. Interestingly, PSB share in total credit outstanding has fallen below the
70% mark for the first time in Indian banking history with private banks
consistently gaining market share, which is currently pegged at around ~30%. In
fact, nearly 80% of the total credit flows in FY18 came from PVBs.
The Income Statement hasn’t come as a surprise either, given the above
factors. A de-growth in interest expended helped Net Interest Income (NII) to
actually rise by 7.5%, pegged at Rs. 3,685 billion; the Net Interest Margin
(NIM) remained stable at 2.5% as strong offtake shored up assets. Interest
income grew by 1% while operational expenses grew by 9.3%, primarily due to
higher expenditure on manpower. Provisions and Contingencies was another category
which expanded by 33.3% due to the AQR and subsequent Prompt Corrective Action
(PCA) requirements. Overall, SCBs recorded a collective loss of (-) Rs. 324
billion in FY18 as compared to a profit of Rs. 439 billion, the previous year. Having
said that, the impact of provisioning and other expenses was highest for PSBs
as the category was responsible for the overall recorded losses.
Profit
Metrics: PSBs managed to get lower Returns
on Advances as compared to other categories – with the difference being almost
120 bps with that of PVBs
Since overall, the banking sector
was running losses, the impact on Return on Assets (RoA) and Return on Equity
(RoE) was also significant. Both these metrics recorded (-) 0.2 and (-) 2.8
respectively and augur sustained pressures on bank balance sheets. However, the
PSBs were again to be blamed for the debacle as only this category recorded
negative ratios; the other two, namely PVBs and FBs continued to have healthier
metrics, albeit lower as compared to the previous year.
Overall Spreads, which are the difference between Return on Funds (RoF) and Cost of Funds (CoF) are recorded at 2.8, similar to that of the previous year. All banking categories remained consistent with previous year’s number in this metric. The spreads of PVBs and FBs remained higher than those of PSBs primarily not because of any kind of inefficiencies. Rather, it was a result of comparatively higher Cost of Deposits for PSBs, which stands at 5.1% as compared to PVBs with 4.9% and 3.8% for FBs. Also PSBs managed to get lower Returns on Advances as compared to other categories – with the difference being almost 120 bps with that of PVBs.
Capital
Adequacy & Leverage: Leverage Ratio for PVB
and FB has gone up substantially over the quarters and has breached the 9%
threshold, PSBs on the other hand record it at sub 4%
Capital to Risk Weighted Asset
Ratio (CRAR) in the overall banking sector actually improved thanks to higher
capital funds raised by PVBs and FBs, which are also more leveraged as compared
to their PSB counterparts. Leverage Ratio for PVB and FB has gone up
substantially over the quarters and has breached the 9% threshold, PSBs on the
other hand record it at sub 4%.
Falling retained earnings have however
made sure that PSBs end up with eroded Tier 1 Capital, which has fallen from
Rs. 5,480 billion to Rs. 5,270 billion in FY18. The Government of India’s
recapitalization plan aims to strengthen this metric in the current and next
financial years. Overall, at 13.8%, Tier 1 & 2 capital for all banking
categories have been recorded beyond the BASAL 3 mandate of 12.5%.
Apparent from the mentioned
details it is therefore apparent that the banks are under stress and that in
turn is impacting their performance and mandates towards the economy. While it
is clear that rising offtake signifies that the SCBs are not shying away from
their responsibilities and are pitching in with their resources when other
sources have become unviable, the sustainability of it all remains
questionable, given the current stress levels.
The Gross NPA level, about which
we will talk about in detail in the next report has risen to 11.2% and so has
been the contribution of SMA 2 accounts, which signals substantial systemic
stresses. With the 11 PSBs, that have come under the Prompt Corrective Action
(PCA) mandates, the RBI has taken out a major part of India’s financier group,
increasing demands on the ones remaining - making risk less distributed. The
provision costs, s mentioned have gone up and are eating into bank profits for
the most part.
All in all, given the fact that the economy will continue to expand by over 7% for at least two more decades, we must keep in mind that the demand for credit will be relentless. If asset quality ceases to improve, India’s growth potential may actually be compromised.