Asset quality pains for banks ease, focus on growth likely in H2

Asset quality pains for banks have largely eased after the second quarter and they are now likely to focus on growth, believe analysts.

A report by ICICI Securities noted that overall the quarter ended September 30, 2021 saw improvement in broad business parameters and management commentaries have been positive suggesting better traction in the second half of the fiscal.

“We believe profitability should see a boost in coming quarters with better top-line growth and lower provisions. Loan growth is to be largely driven by retail and MSME segment while corporate segment should witness gradual pick up in working capital utilisation,” it said.

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Asset quality performance was better than previous quarter with less slippages and better recoveries, the report said.

Slippages were mostly at about 1- 1.4 per cent compared to 2-2.5 per cent quarter-on-quarter while gross non performing assets declined by 30 to 70 basis points, except for a few banks.

With the opening up of the economy and normalisation of business activities, most banks have reported better collection efficiencies as well as higher credit demand.

“The asset quality pain for most banks is largely behind and the focus now is on the growth acceleration. The one-off gains helped public sector banks to maintain a strong profitability; whereas the private banks’ performance was a shade better than the first quarter,” said a report by Emkay Global Financial Services.

The second quarter of the fiscal was marked by sequential moderation in stress formation, mainly led by retail, and more so for large private and public sector banks, the report said, adding that it expects non performing asset ratios to moderate due to lower slippages and higher recovery and write offs as most banks, barring a few small private banks, sit on a comfortable provision cover.

Motilal Oswal in a report also said that the asset quality outlook for public sector banks is improving gradually after a prolonged corporate NPL cycle – GNPA ratios had reached the peak of about 15 per cent in 2017-18.

A recent report by CARE Ratings had also noted that the NPA situation of the Indian banking system as represented by 23 banks – 9 PSBs and 14 private sector lenders, indicates a gradual improvement in the NPA ratio in September 2021.

The NPA ratio for these 23 banks was 6.97 per cent as on September 30, 2021 compared to 7.36 per cent as on September 30, 2020.

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