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May 04, 2018

Sector Report: Banking

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Table of Contents


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



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 of improving working capitaldemand; marginal pick-up in private investments; higher government spending on infrastructure sector; improvement in commodity prices, and bettercapital adequacy level due to the government's recapitalisation plan. However, further growth will be arrested by poor asset quality, low capitaladequacy level of banks (especially for the public sector banks) and limitation on the lending operations of a few public sector banks (PSBs) because ofprompt corrective action (PCA) framework.


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 11-13% 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 fiscal 2016, growth wassignificantly higher than the industry and agriculture credit growth. The retail segment accounts for a fifth of overall systemic credit and derives a majorshare from housing finance. Consequently, it witnessed significant pain due to the demonetisation-driven slump in the real estate sector. However, weexpect 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 asset sales to asset reconstructioncompanies (ARCs) during the year, and high slippage into NPAs, mainly from restructured standard 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 at 3.7-4.2%. Thoughasset-quality concerns will continue until fiscal 2019, GNPA might improve marginally, by 20-40 bps, because of lower slippage from previous yearsand revised NPA resolution framework by the 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 past few quarters, which has impacted yields. Provisions will remain high, because of high slippage and fresh provisioning. As a result, ofthe 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 toexpected net losses by many PSBs. Their ' RoA is 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 theoverall RoA of the banking industry to be ~0.2% by the end of fiscal 2018; however, it will improve by 10-15 bps in fiscal 2019 to 0.3-0.4%. Themarginal improvement in the industry's RoA in fiscal 2019 will be majorly because of PSBs' 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 to vulnerable sectors; andhigher proportion of fee income to total income compared with public peers. The profitability (RoA) for them will decline marginally in fiscal 2018, but willremain stable at 1.3%. However, it is expected to improve 5-10 bps in fiscal 2019.