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This article is more than 1 year old.

Private banks in Q1: Stable NIMs, lower moratorium 2.0, rise in contingency buffer

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The quarter ended June 2020 was characterized by unprecedented trends for the private banks that saw contingency buffer augmented, accelerated NPL recognition, average loan book under moratorium 2.0 at sub-15 percent, a sharp contraction in fee income and enough cost flexibility linked to business volumes, a report said.

Private banks in Q1: Stable NIMs, lower moratorium 2.0, rise in contingency buffer
The quarter ended June 2020 was characterized by unprecedented trends for the private banks that saw contingency buffer augmented, accelerated NPL recognition, average loan book under moratorium 2.0 at sub-15 percent, a sharp contraction in fee income, and enough cost flexibility linked to business volumes, according to ICICI Securities.
However, stability in net interest margins, treasury gains, and cost flexibility was the surprise. The overall core operating profit of private banks grew 5 percent YoY and elevated credit cost led to over 15 percent decline in net profit, the report said.
The brokerage believes more visibility on growth, cost agility, and credit cost to emerge only in H2FY21.
During Q1FY21, the lenders further strengthened their balance sheet by augmenting contingency buffer and enhancing coverage. The cumulative buffer averaged at 60-70 bps across banks. Bandhan and AU Small Finance Bank have built higher buffer while HDFC Bank and Federal Bank at the lower end.
The moratorium 2.0 was anticipated to be lower given activity resumption and focused collections.
“However, settling at 9 percent for HDFC Bank, Kotak Mahindra Bank and Axis Bank and sub-15 percent for IndusInd Bank and RBL Bank is encouraging given that bankers followed only opt-in approach and approved only after effective viability review,” the report highlighted.
What is still unknown is the estimable probability of default from moratorium book and collection efficiency amongst non-moratorium customers.
Amongst categories, corporate proportion seemed to have declined sharply, with improved recovery trends in MFI, credit card, agriculture, etc. Moratorium stays higher for SMEs, CVs, real estate, cab aggregators, etc, the report highlighted.
During the quarter, operating expenses contracted 15-20 percent QoQ on an average primarily led by lower volumes and cost curtailment. However, the management of banks suggested it is below normal and should rise as activity resumes.
Further, MCLR cut, moderation in C/D ratio and surplus liquidity were expected to drag net interest margins (NIM). However, mix change (in favour of retail) and lower deposit cost offset the drag for a few banks and NIMs were surprisingly stable, the report noted.
Banks’ credit growth in the quarter ended June 2020 moderated to 6-8 percent, YoY (down 2-3% QoQ) due to lockdown-related disruption. On the other hand, deposit flow were steady and CD ratio contracted.
“The banks are preparing for resilience and sustainability and those with strong franchise, sufficient capital buffer and proven risk-management would come out stronger than peers,” ICICI Securities said.
The brokerage firm prefers HDFC Bank, Kotak Mahindra, Axis Bank.
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