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September 11, 2017

Sector Report: Banking

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Banking credit growth to recover over next two fiscals


CRISIL Research projects bank credit (year-end) to surge to 7.5-8.5% in fiscal 2018, from 4.4% in fiscal 2017, owing to improving working capitaldemand; marginal pick-up in private investments; higher government spending on infrastructure sector; improvement in commodity prices, andexpectations of a good monsoon season. However, further growth will be arrested by poor asset quality, low capital adequacy level of banks (especiallyfor the public sector banks) and limitation on the lending operations of few public sector banks (PSBs) because of prompt corrective action (PCA)framework will restrict any steep increase in the credit growth of banking sector.


We further expect systemic credit to grow 10-11% (on-year) by above-average credit growth for non-banking financial companies (NBFCs). Systemicand banking credit growth is further expected to improve to 11-12% and 8.5-9.5%, 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 fiscal 2016, the growth wassignificantly higher than industry and agriculture credit growth. Retail accounts for a fifth of overall systemic credit and derives a major share fromhousing finance. Consequently, it witnessed significant pain due to the demonetisation- driven slump in real estate sector. However, we expect banksto continue focusing on the retail segment due to its improving risk-reward ratio and project growth to range between 16% and 19% in fiscal 18 and 19.


Asset quality to deteriorate further in 2017-18, slight improvement likely in 2018-19


Asset-quality pressures are likely to be intense throughout fiscal 2018 due to inadequate recognition in the past; lower asset sales to assetreconstruction companies (ARCs) during the year and high slippages to NPAs mainly from restructured standard accounts.


We expect the gross NPA level of SCBs to cross the 10% mark in fiscal 2018 with PSBs' gross NPAs (GNPAs) at 13-13.5% and private banks GNPAat 4-4.5% level. Though asset quality concerns will continue till 2018-19, the GNPA level might improve marginally, by 20-40 bps, on account of lowerslippages from previous years and several schemes by government and RBI to support the deteriorating asset 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; and continuous interest ratecuts over the last few quarters, which has impacted the yield. Provisions, as a proportion of total assets, though lower from the previous fiscal will stillremain at high levels because of continued high level of slippages and fresh provisioning. As a result, of the 21 PSBs, we expect some of them to stillpost losses or very low profits. We expect provision and slippages for PSBs to be lower in fiscal 2018 from the previous fiscal and hence, its return onassets (RoAs) will improve to ~0.04% and turn positive from a negative RoA level in the previous fiscal. PSBs' RoA is further expected to improve to0.2% in fiscal 2019.


Overall, RoA of the banking industry is also expected to improve 5-10 bps each over the two fiscals from 0.3% in fiscal 2017. Hence, we expect theoverall RoA of the banking industry to reach ~0.5% level by the end of fiscal 2019. The marginal improvement in the RoA level of overall bankingindustry is majorly because of PSBs' improved profitability over the next two fiscals.


Private banks' RoAs too will feel the heat but will survive the pressure because of better revenue diversity; lower exposure to vulnerable sectors; andhigher proportion of fee income to total income compared with public peers. The profitability (RoA) for them will reduce marginally in fiscal 2018 to 1.2%from 1.3% in fiscal 2017, however, it is expected to improve 5-10 bps in fiscal 2019.