News Analysis

Retail stress tells on private banks in Q1

Keerthi Sanagasetti BL Research Bureau | Updated on July 27, 2021

Covid second wave effect; lenders have enough provisions


A fallout of the Covid second wave is an uptrend in the NPA cycle, going by the June quarter results of top private banks.

While banks tried to be cautious in their credit growth, the financial stress seems to be impacting their existing book. All the four private banks that have reported their results so far — HDFC Bank, ICICI Bank, Axis and Kotak Mahindra Bank — saw higher slippages in the first quarter of FY22 compared to the March 2021 quarter. Besides, the slippages came mainly from their retail book. The good news is that the banks seem to have sufficient provisions to tide over any stress developing in the coming quarters, too.

GNPA spike

In the June quarter, ICICI bank’s gross non-performing assets (GNPA) ratio spiked to 5.15 per cent from 4.96 per cent in March 2021, breaking the downward trend witnessed in the last couple of quarters. The GNPA ratio spike was largely due to higher slippages in the retail and business banking segment. Of the ₹7,231-crore gross slippages during the June quarter, ₹6,773 crore was in the retail and business banking segment, which collectively form about 66.8 per cent of the bank’s total loans.

However, much of the slippages came from secured book, according to the bank’s disclosures, with the ratio of credit card and personal loans in the GNPA loans trending lower compared to previous quarters. Of the retail slippages, ₹1,130 crore and ₹961 crore were from jewel loan and kisan credit cards portfolio, each segment comprising 3 per cent of the bank’s overall loans.

Axis Bank, which had been ramping up its retail portfolio the last couple of quarters, too, saw a similar trend in the slippages in the June quarter. While the bank’s overall GNPA ratio was 3.85 per cent in the first quarter, up 15 basis points since the March quarter, the segmental bad loan disclosures reveal the trend. The retail segment saw the GNPA ratio surge from 1.8 per cent in March 2021 to 2.6 per cent in the June quarter. In contrast, both the SME and the corporate book GNPAs improved to 4 per cent in the June quarter from 5 per cent at March-end, and 5.3 per cent (5.7 per cent).


A pivot

Foreseeing such a stress developing, HDFC Bank took a cautious stance on expanding its retail credit portfolio and turned to quality corporate loans (rated AA and above) to grow its advances. Despite the corporate loans entailing lower yields, the management seems to have preferred a lighter blow to the net interest margin (NIM) to a higher GNPA ratio. The bank reported a 15 basis points (bps) increase in its GNPA ratio in the June quarter from the March 2021 levels. However, its subsidiary, HDB Financial Services (an NBFC that finances individuals and MSMEs) reported a 386 bps spike in its GNPA ratio to 7.75 per cent in the June quarter over the March quarter (up 489 bps from June last year).

Despite a near halt in its credit offtake, Kotak Mahindra Bank, too, saw a 31 bps jump in its GNPA ratio compared to the March quarter (up 86 bps since June last year). The bank did not disclose the segmented break-up of the slippages in its June quarter presentation.

Cushion of provisions

The top private banks, however, seem to have adequately provided for their bad loans. ICICI Bank, on the one hand, ramped up its provisions on standard assets (read: non-GNPA) by ₹1,106 crore (y-o-y) in the first quarter, and on the other, wrote back ₹1,050 crore of Covid-related provisioning done last year. Net-net, the bank’s provision coverage ratio stood at a healthy 78.2 per cent of the bad loan portfolio in the June quarter compared to 77.7 per cent in March 2021.

Besides, the bank’s management expects loan restructuring (extended to September 2021) to help cushion the blow of the pandemic in the coming quarters.

About 0.6 per cent of ICICI Bank’s advances have been restructured so far.

In the case of HDFC Bank, the total provisions (specific, floating, contingent and general) cover 146 per cent of the GNPA. Axis Bank and Kotak Mahindra Bank hold provisions that cover at 118 and 94 per cent of their GNPAs, respectively.

Note that these provisions are all-inclusive — standard provisions, specific, additional and Covid related.

Published on July 26, 2021

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