The RBI’s recently released Financial Stability Report (FY19) highlights a few interesting trends:
a) Banks: Asset quality is improving—GNPL declined. Further lower SMA-2 and improved coverage >60%, lends comfort. Though stress is waning, capital for PSU banks (PSB) is still challenging (five banks may have CRAR below regulatory level by FY20)in the absence of further capital support;
b) NBFC/HFC: Risk perception has dampened confidence, reflected in availability and cost of money (higher spreads);
c) Consumer credit: NBFC have been leading delinquency levels of almost all consumer creditsub-segments; and
d) Mutual Funds: Debt concentration is a challenge in FMP (top 5 holdings across schemes >40% of aggregate corporate debt portfolio).
The report findings reaffirm our stance of structurally favouring private banks over PSB and sticking to NBFC with strong balance sheets; within product segments, we recommend caution on the real estate segment (LAP/construction developer financing).
Banks: Asset quality turning around, but capital still a challenge
With bulk of legacy NPLs already recognised, the NPL cycle seems to have turned around—GNPL have declined to 9.3% (across segments and banking groups). Impressively, decline in SMA-2 (from 1.06% in H2FY19 to 0.73% in FY19) and rising coverage (>60%) lend comfort. Moreover, in baseline stress test, GNPLs are expected to dip further to 9%. That said, capital remains a challenge for PSB (five banks may have CRAR below regulatory level) sans further capital support.
NBFC: Risk perception has dampened confidence
Recent developments have kicked risk-on for NBFC, especially with regards to exposure, asset quality and ALM. Challenges on liquidity persist, reflected in availability and cost of money (spreads widened to >150bps from <100bps in August 2018; . While strong NBFCs are managing, the situation remains challenging for others. Dependence on market borrowing (NCD/CPs) has reduced (from >55% in FY18 to 49%); tilting towards bank borrowings. A red flag is promoter pledge (INR2.25tn), wherein exposure to non-banks has risen from sub -10% levels in FY14 to >40% in FY19.
Consumer credit: NBFC top delinquency levels
Consumer credit has clocked strong >20% CAGR across sub-segments with relative shares of various intermediaries being fairly stable . That said, NBFC, as a group, have been leading delinquency levels in almost all the sub-segments (auto, housing loans, LAP and personal loans) of consumer credit. As NBFCs are facing adverse selection bias given the choice of funding lines, cognitive steps are being taken to ensure improved access to long-term liability instruments.
Our View: The current systemic risk aversion will benefit banks (we prefer – ICICI Bank, Kotak Bank, and SBI within PSB). Within NBFC/HFC, well-run entities with healthier balance sheets and prudent risk management are relatively better positioned.