Credit costs for PSU banks to moderate in FY22, says Morgan Stanley; upgrades Bank of Baroda

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The state-run lenders will see a tussle between higher restructured loans and lower NPAs in FY22, while their credit costs are expected to moderate depending upon the duration of the second wave of COVID-19, brokerage firm Morgan Stanley said in a report.

The state-run lenders will see a tussle between higher restructured loans and lower NPAs in FY22, while their credit costs are expected to moderate depending upon the duration of the second wave of COVID-19, brokerage firm Morgan Stanley said in a report.
“FY22 will see a tussle between higher restructured loans and lower NPLs, amid a turn in corporate NPL cycle. We expect credit costs to moderate in FY22; the extent will depend on the duration of existing/new COVID-19 waves,” Morgan Stanley said.
The impaired loan formation of the state-owned banks, except for SBI, in FY21, was elevated and much weaker than that of SBI’s. The underperformance was led by corporate as well as retail banking space.
CLSA expects moderation in FY22, given lower corporate NPLs, moderation in retail slippages, and modified ECLGS lending scheme, which allows extension of interest-free period.
However, collection efficiency for non-SBI state-owned banks is much lower than at SBI – this will drive greater restructuring during H1FY22, according to CLSA.
As a result, the brokerage expects bad loan formation to moderate but remain elevated. It expects Bank of Baroda to do relatively better among non-SBI PSU banks.
Further, in FY21, credit costs were elevated at around 170-275 bps and drove better NPL coverage ratios.
“However, banks still have limited coverage on restructured loans – in FY22, the stock of restructured loans will move higher, and hence SoE banks will still need to catch up on provisions. Consequently, we expect credit costs to moderate in FY22, but normalization will likely be an FY23 event,” CLSA said.
While State Bank of India (SBI) remains the top pick in the PSU space, Morgan Stanley believes that Bank of Baroda (BoB) is best placed among the non-SBI PSU banks. The brokerage house has upgraded Bank of Baroda to Overweight from Equal-weight and raised the target price to Rs 110 per share from Rs 100 earlier.
“We expect earnings to improve gradually as the corporate NPL cycle turns, driving higher profits in FY22 and onwards. We believe current valuations at 0.5x FY22e BV do not price in the forthcoming ROE recovery,” CLSA said.

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