We conducted our Banks/Financials conference with participation from ~20
banks/NBFCs and banking tour covering regulators/industry experts. Overall
feedback suggested very weak credit offtake but extremely mixed views on near
term asset quality. Apart from easing rates, the most certain positive outcome was
on easing regulatory pressure for the sector especially for NBFCs. Overall feedback
was split in two contrasting halves with PSU banks at one end and retail
banks/NBFCs on the other (positive) and corporate banks/financiers like ICICI/IDFC
having a mixed outlook. We continue our preference for ICICI/Axis/Yes and also
believe most retail NBFCs are well positioned for an easing rate cycle and risks
from tightening regulations is nearing the end.
Growth targets revised down; a few exceptions though: Most banks have
revised their system growth target to ~14-15% with negligible term/capex
related off take and SME/Retail is thus the focus area. PSU banks were most
cautious on growth outlook also constrained by FinMin dictat on bulk deposits.
Among private banks/NBFCs, kotak's caution inched up (~20% now v/s 25%
earlier) and Shriram (12‐15%) continues with its low growth expectations.
Mahindra Finance (~30%) still remains most sanguine on growth, followed by
IndusInd (+25%). ICICI bank still remains positive on domestic loan book (20%
growth) but expects slower core fee income momentum (<10 growth="growth" p="p"> Margins to look up; especially for private banks/NBFCs: Lower wholesale rates
is a boon for NBFCs and also for banks like ICICI/Yes aided by lower competition
on bulk deposits. Pricing power is robust on the corporate side with retail seeing
some pricing competition. In spite of higher competition, retail banks/NBFCs
with fixed rate book (MMFS/HDFCB/KMB/IIB) and wholesale funded
institutions like IDFC/Yes have a positive outlook on margins. Reduced
dependence on bulk deposits is a structural positive for PSUs but we believe
PSU's margins may be impacted as the rate cut cycle begins in 2H13.
Incremental spreads for LICHF is fine (1.6-1.7%) but slow disbursements in
builder portfolio with impact the margin improvement process.
Mixed feedback on Asset quality: (1) Retail asset quality continues to hold firm
except for CVs where SHTF/IIB continue to be sanguine but Kotak/HDFCB and
more importantly, CIBIL seemed more cautious. (2)Asset quality for PSU banks
continue to remain more linked to macro which is not showing signs of pick-up
as yet (3) PFC/REC were positive on SEB reforms but CRISIL was suspect on a
complete turnaround for SEBs and PFC’s involvement in most stressed power
assets is a further drag (4) Private corporate financiers like ICICI/Yes/IDFC
expect some marginal inch up in NPAs but don’t see material change to their
credit costs guidance (ICICI -70/75bps, IDFC- Gross NPA of 1%).
Regulatory intensity to come off; a certain positive in an uncertain
environment: We believe regulatory intensity will be significantly lower now
with RBI keen to implement most regulations relating to NBFCs in a nondisruptive
way (90 v/s 180 days) and pausing on tightening for gold NBFCs.
Dynamic provisions (final guidelines under work) could pose some challenges for
banks but RBI does not see capital issues for most banks under BASEL III.
RBI‐ Meeting with Head of Banking regulations:
Provisions on restructuring necessary: RBI believes with ~10% NPV hits and 5%
standard provisioning recommended, overall provisioning for restructured
accounts is meaningful now. RBI does not distinguish between sectors for
provisioning on restructured accounts but for systemic issues they have in the
past given exceptions on restructuring and lower provision on SEB restructuring
could be a possibility once the FRP for SEBs is finalised.
Dynamic provisioning: RBI is currently working on the final guidelines on
dynamic provisioning and what surprised was that RBI still believes that they
could start implementation of dynamic provisions by FY14 v/s market
expectations of some push back given the current credit cycle. According to RBI,
just 8-9 banks mostly private sector banks have segmental data to compute
internal credit loss ratios and hence dynamic provisions when implemented will
be a drag for most PSU banks.
Comfortable with gold lending by Banks: After tightening of gold lending norms
for NBFCs, the regulatory gap for gold lending between banks and NBFCs have
increased but RBI seemed comfortable with lower restrictions on gold lending
by banks and the key reason is the limited complaints they have received
against banks in past either regarding pricing or auctions. Also, gold exposures is
a lot less concentrated for banks v/s standalone gold lending companies.
Basel III capital requirements not a systemic issue: RBI has recently estimated
that banks would need Rs1.75trn over FY12-18 to comply with Basel III capital
guidelines. Though some small PSU banks will have to face significant dilution,
RBI does not believe that capital raising will be a systemic issue considering
capital raised/generated by banks in the last 4-5yrs.
Other highlights: (1) RBI in its banking supervision has not come across strong
evidence of evergreening by banks using NBFCs as a conduit as this was one of
the larger investor concern in our meetings. (2) RBI acknowledges that moral
hazard issues have led to higher Agri NPAs but believes that it is a national
necessity and considerations on new PSL guidelines will be limited.
RBI‐ Meeting with Head of NBFC regulations:
Overall regulatory landscape for NBFCs: RBI indicated that the tighter
regulations for NBFCs over the last ~24mnts, is just a catch up on regulations for
NBFCs v/s Banks as there have not been significant changes in NBFC regulations
from 1997-98 to 2010 while Basel-I/II and other periodic regulatory changes
happened for Banks. RBI appreciates NBFC’s role in promoting financial inclusion
and considers them systemically very important.
Regulatory window for PSU NBFCs: PFC/REC’s NPA recognition and also
provisioning norms allowed are much less stringent than other PSUs. In line with
Usha Thorat committee recos, RBI wants to close the regulatory gap by
introducing standard provisioning for PFC/REC. Feedback from RBI and PFC
suggests that the window to provide standard provisioning will be upto FY16,
limiting provisioning to only 0.05% of advances a yr. Restructuring could
increase for IFCs and RBI is working on the same.
Gold NBFCs: High growth and some pricing and auctions process was RBI’ key
issues with Gold NBFCs and with growth coming off and also lesser complains on
auctions/pricing, we sense regulatory intervention will be fairly limited including
no intention of any regulations regarding auctions. RBI is cognizant of LTV
calculation misuse (including making charges) but does not see any near term
regulatory intervention on this. Also, RBI is willing to reconsider relaxing some
tightening of these regulations if they see industry wide discipline in all
processes mentioned above.
NPA recognition – 180 to 90days: RBI intends to bring down NPA recognition of
NBFCs from 180 to 90 days but does not intend to implement this in a disruptive
manner and this stance seemed a little different from our earlier interactions
hinting to higher transition time to move from 180 to 90 days NPA recognition.
Others: (1) On investor concerns on smaller NBFCs being used as a conduit for
ever greening by banks, RBI mentioned that nothing material has come to their
attention and this is regularly monitored by both the Banks/NBFCs supervisory
team (2) Do not intend to extend dynamic provisions for NBFCs in the near
term.
Overall, we continue to maintain that regulatory intensity will significantly come
off for NBFCs and peaking rate cycle + manageable retail asset quality builds a
positive environment for most NBFCs.
– Credit bureau
Update on current retail asset quality: Retail asset quality continues to hold up
and CIBIL believes the structural story of better underwriting by banks aided by
data from CIBIL continues. Auto especially CVs is the only segment where CIBIL
is sensing some marginal deterioration in credit behaviour and they are keeping
a close watch but even in these categories they have not seen material
deterioration in 30/60/90 day delinquencies.
Details from our July‐12 Update on CIBIL:
CIBIL‐ Breadth and depth: All Banks/NBFC/Financial institutions are mandated
to submit monthly data on retail loans to any one credit bureau, largest of them
being CIBIL. CIBIL’s coverage is extensive with ~230m a/cs and ~135m
individuals covering ~800 financial institutions. Unlike general perception of
“CIBILisaton” of only urban/metro centres, only 35% of CIBIL’s retail records are
from top-20 cities, with 65% from smaller towns and rural areas. CIBIL not only
gets data on NPAs but also repayment details of every retail loan o/s and hence,
they can generate reports on early stress indicators like 30/60 day overdue as
well.
CIBIL, gauging usage—and the impact: Most retail loan applications are
referred to CIBIL and the hit rate (probability of finding a CIBIL record) on
aggregate basis is ~70-75%, with credit cards having a hit rate of +90% and 2-
wheelers of <50 according="according" cibil="cibil" delinquency="delinquency" for="for" p="p" rates="rates" surprisingly="surprisingly" to="to">portfolio without CIBIL hit are similar to portfolio with CIBIL hit. This does not
undermine importance of credit bureaus but this is because banks/NBFCs do
more extensive due-diligence while lending to people without a CIBIL record.
PSU bank’s use of CIBIL data is limited though a few PSU banks have increased
number of CIBIL queries.
Low credit costs in unsecured retail book, a function of cherry picking‐‐amidst
low growth and competitive intensity: CIBIL suggests that high credit quality
being witnessed in the unsecured loan book could be attributed to calibrated
growth strategy by the players in the market. Further post the FY08-09 hit, lots
of player have avoided this segment allowing the remaining players to cheery
pick among the customers. Loan growth in credit card has inched up in FY12 but
still remain very modest at 15% and CIBIL does not see any negative surprises in
unsecured book in the near term.
For more details please refer to our July-12 note “ CIBIL'ised India ‐ No signs of
any crack yet”
S&P‐ CRISIL: Meeting with Head of Infra and Banks rating
Increase in restructructing from RS2trn to Rs3.25trn does not still consider
problem of private power sector largely: CRISIL recently increased its FY11-13
forecast for additional restructuring from Rs2.0trn to Rs3.25trn with large part
of the increase coming from SEB restructuring increasing from Rs0.6trn to
Rs1.5trn in line with the FRP (financial restructuring package) for SEBs being
discussed. CRISIL does not expect large scale restructuring on their private
power portfolio in FY13 and hence their increased restructuring forecast does
not capture restructuring expected in private power mainly in FY14-15.
Infra ‐ Concerned with gas; also not very convinced on SEB health: On the Infra
side, CRISIL is extremely concerned on private gas based power plants as
substituting domestic gas for imported LNG is still not viable in spite of ~20% fall
in RPLNG short term contracts. On coal based plants, CRISIL expects some
restructuring but with domestic coal production ramp up does not expect many
projects to be duds though the recent scams makes it difficult to put a number
to the overall private power restructuring expected. Though most SEBs have
taken back to back hikes, CRISIL overall was not too sanguine about SEB health
as even the best outcome on current reforms at best reduce current losses and
the estimated Rs3.0trn of loans will continue to remain a burden and hence we
do not rule out some NPV hits in the FRP for SEBs.
Upgrade: downgrade ratio still worsening: The upgrade to downgrade ratios
continue to worsen and currently is just under 1.0x v/s 1.15x 6mnts back but
CRISIL does not expected the ratio to worsen to 0.85x low seen in the FY08-09
crisis. All CRISIL's estimates are based on GDP growth expectation of 5.7%
growth and downside to this GDP growth estimate could imply further
deterioration.
Some positive news flow though: Though CRISIL was not at all sanguine on
asset quality some possible positives in the near term according to them could
be (1) The FRP for SEBs could provide some liquidity to the SEB chain and some
ancillary industries facing stress due to cash flow constraints could get some
relief post the implementation of the FRP, though CRISIL cautions that
additional liquidity will still be required to fund interim SEB losses. (2) Longer
term NPA worries from thermal power plants seem limited given viable
alternate of imported coal and more importantly increase in domestic coal
production expected at a steady pace.
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