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September 01, 2018

Sector Report: Banking

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Table of Contents


  • Summary
  • Advances
  • Occupation-wise credit
  • Capital adequacy
  • Deposits
  • GNPA
  • NPA resolution schemes
  • Profitability



Banking credit growth to recover over the next two fiscals


CRISIL Research projects bank credit (year-end) to surge to 8.0-9.0% in fiscal 2018, from 3.7% in fiscal 2017, because ofimproving working capital demand; marginal pick-up in private investments; higher government spending on infrastructuresector; improvement in commodity prices, and better capital adequacy level due to the government's recapitalisation plan.However, further growth will be arrested by poor asset quality, low capital adequacy level of banks (especially for the publicsector banks) and limitation on the lending operations of a few public sector banks (PSBs) because of prompt corrective action(PCA) framework.


We further expect systemic credit to grow 10-11% (on-year) by above-average credit growth for non-banking financialcompanies (NBFCs). Systemic and banking credit growth is further expected to improve to 11-13% and 10-12%, respectively,in fiscal 2019.


Retail segment growth to remain highest among all


Though demonetisation significantly affected retail sector credit growth in fiscal 2017, down ~300 basis points (bps) from fiscal2016, growth was significantly higher than the industry and agriculture credit growth. The retail segment accounts for a fifth ofoverall systemic credit and derives a major share from housing finance. Consequently, it witnessed significant pain due to thedemonetisation-driven slump in the real estate sector. However, we expect banks to continue focusing on the retail segment,due to its improving risk-reward ratio, and we project growth to range between 17% and 20% in fiscals 2018 and 2019.


Asset quality to deteriorate further in fiscal 2018, but a slight improvement is likely in fiscal 2019


Asset-quality pressures are likely to be intense throughout fiscal 2018, due to inadequate recognition in the past, lower assetsales to asset-reconstruction companies (ARCs) during the year, and high slippage into NPAs, mainly from restructuredstandard accounts.


We expect gross NPA (GNPA) of SCBs to cross 10% in fiscal 2018, with PSBs' GNPA at 14-14.5% and private banks GNPA at3.7-4.2%. Though asset-quality concerns will continue until fiscal 2019, GNPA might improve marginally, by 20-40 bps,because of lower slippage from previous years and revised NPA resolution framework by the RBI to support the deterioratingasset quality of banks.


Banks' profitability to remain low


We expect fiscal 2018 to be another year of weak profitability, due to higher NPAs, continued high level of provisioning, andcontinuous interest rate cuts over the past few quarters, which has impacted yields. Provisions will remain high, because ofhigh slippage and fresh provisioning. As a result, of the 21 PSBs, we expect some of them to post losses or very low profits.Return on assets (RoAs) will remain in the negative territory for PSBs, due to expected net losses by many PSBs. Their ' RoAis expected to turn positive in fiscal 2019.


Overall, RoA of the banking industry is also expected to decline 5-10 bps during the current fiscal from 0.3% in fiscal 2017.Hence, we expect the overall RoA of the banking industry to be ~0.2% by the end of fiscal 2018; however, it will improve by10-15 bps in fiscal 2019 to 0.3-0.4%. The marginal improvement in the industry's RoA in fiscal 2019 will be majorly because ofPSBs' improved profitability during the next fiscal.


Private banks' RoAs too will feel the heat, but will survive the pressure because of better revenue diversity; lower exposure tovulnerable sectors; and higher proportion of fee income to total income compared with public peers. The profitability (RoA) forthem will decline marginally in fiscal 2018, but will remain stable at 1.3%. However, it is expected to improve 5-10 bps in fiscal2019.