Cloud on banking stocks on NPA concerns amid second wave of pandemic

The Nifty Bank index has come off 15 per cent from its peak in February, underperforming the benchmark Nifty which is down 6%.

The second wave of the Covid pandemic in India is threatening to bring back woes for banking stocks, owing to the possibility of a rise in non-performing assets and projections of lower economic growth.

The Nifty Bank index has come off 15 per cent from its peak in February, underperforming the benchmark Nifty which is down 6 per cent.

There can be a sharper sell-off, especially by institutional inve­stors, if the current Covid-19 situation continues for the next month or two.

And while PSU banks have borne the brunt of the fall, so far, private sector banks can also slide substantially this quarter, said experts.

“Asset quality fears are rising because of the second wave of the pandemic.

"SMEs and MSMEs are struggling, and banks’ lending to these entities can see a rise in slippages.

"Banks will also have to be careful about unsecured or personal loans as incomes of individuals may come under stress owing to pay cuts or job losses.

"NBFCs engaged in vehicle and equipment financing can see a deterioration in asset quality, as well,” said Deepak Jasani, head-retail research, HDFC Securities.

According to Jasani, interest rates are on the upswing despite efforts by the Reserve Bank of India (RBI) to control the yields of 10-year government securities, and this may impact banks' debt investment portfolios.

The hardening of yields has already impacted treasury income, with PSU banks being impacted the most.

The recent RBI data suggests that credit growth has shown a gradual improvement since unlocking the economy, and reached about 6.5 per cent by February 2021, from 5.6 per cent in October 2020.

Since there has been a resurgence in the pandemic and partial lockdowns, there is a likelihood of delayed recovery in credit offtake.

Hence, the growth outlook, presented by the management, would be key to watch.

Also, preliminary assessment of the impact of the partial lockdown, especially on the MSME and the microfinance segments, will remain in focus as it will lay the foundation for future earnings trajectory, said a note by ICICI Direct Research.

Most sectors, except IT and industrials, have seen P/E multiples decline year to date, with the most significant de-rating seen in banks, NBFC, telecom and discretionary, observed Credit Suisse.

Localised lockdowns are also expected to hurt the country's GDP growth, although the impact may nowhere be as pronounced as last year.

CARE Ratings and ICRA, for instance, have revised downwards their GDP growth estimates by 0.5 percentage points.

Currently, the consensus GDP forecast for India stands between 10.5 per cent and 12.5 per cent for FY22.

“While GDP growth for FY22 has been revised downwards, a rate of 10.5 per cent is still achievable if the Covid situation comes under control by mid-May as the bounce from low economic activity is expected to be sharp,” said Jasani.

“While the second wave of the Covid-19 pandemic in India and subsequent restrictions may lead to some growth worries, we believe corporates are better prepared this time.

"We recommend investors use this weakness as a buying opportunity.

"We continue to prefer cyclicals over defensives and mid-caps over large-caps as we believe the growth can rebound sharply in the H2FY21,” said an India Market Outlook note by Credit Suisse Wealth Management.