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Moratorium, restructuring, NPA overhangs continue for banking sector, says ICICI Direct

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Further, incremental stress amid COVID and ageing NPAs are keeping credit cost elevated in the near term, the brokerage said in a report

Moratorium, restructuring, NPA overhangs continue for banking sector, says ICICI Direct
The impact of unlocking measures initiated by the government is very much prevalent in economic activity and the direct outcome is reflected in the banking sector also. It is witnessing positive development on loan repayment amid a reduction in the Q1FY21 moratorium book. Further, prudent restructuring norms announced by the Reserve Bank of India (RBI) with the inclusion of retail loans added strength to the effort in faster economic revival.
Analysts believe the decline in moratoriums and unlocking will enable normalisation, leading to a gradual revival in business momentum. The structural changes undertaken are expected to have a positive impact in the long run.
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In the quarter ended June 2020, the earnings of banks’ were characterised by lower slippages on the back of standstill asset classification norms.
However, uncertainty looming around the extent of the moratorium and anticipation of elevated credit cost keeping earning muted acted as deterrents.
According to ICICI Direct, restructuring is seen at 6-8 percent of advances with private banks relatively better at 2-5 percent and PSU banks bearing a larger share. NBFCs and HFCs are expected to witness restructuring below 10 percent primarily from wholesale exposure.
Further, incremental stress amid COVID and ageing NPAs are keeping credit cost elevated in the near term, the brokerage said in a report. Credit cost is expected to be at Rs 4-4.5 lakh crore in the next two years i.e. around 200-225 bps in FY21-22E. Hence, the earnings trajectory is expected to remain moderate ahead.
Restructuring demand from large corporates is expected to remain benign.
"Consequently, we prefer large banks with the low moratorium and limited exposure to troubled sectors, efficient business model, adequate provision buffer and capital for bolstering future balance sheet growth,” ICICI Direct report said.
On Monday, HDFC reported a 9 percent rise in individual loan approvals in the September quarter while individual loan disbursements were down 5 percent, YoY.
HDFC Bank reported advances growth of 16 percent during the quarter while its deposits grew by 20 percent. At the end of September, the bank’s total advances stood at Rs 10.37 lakh crore against Rs 8.9 lakh crore during the corresponding period last year.
IndusInd Bank’s advances as of September 30, 2020, rose 2 percent to Rs 2 lakh crore from Rs 1.97 lakh crore while deposit deposits increased 10 percent to Rs 2.28 lakh crore, YoY.
The six-month lockdown and falling confidence level of consumers are expected to lead to a contraction in GDP in FY21E. Thus, ICICI Direct expects advances growth to remain moderate in low single-digit in FY21.
The brokerage prefers large private banks like HDFC Bank and Kotak Bank in the sector.