BackInfrastructure to get lower contributions from banks: Report
Less-than-favourable outlook on economic viability of some infrastructure projects may keep banks away
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Credit demand has been passive during the first half on financial year (FY) 2016, given the slow-moving economic activity and moderate capital expenditure (capex) plans, according to report named Banking & Financial Services: A long and arduous wait for recovery, stay selective, by Emkay Global Financial Services Ltd.
Falling commodity prices have led to subdued demand for working capital credit. Infrastructure credit was the key driver of bank credit in the previous monetary easing cycle. However, banks are unlikely to be major participants in the next phase of infrastructure capex (FY17-18), due to the less-than-favourable outlook on the economic viability of some infrastructure projects.
Additionally, there is strong support for infrastructure financing likely from other multi-lateral agencies like the World Bank Group, the the Asian Infrastructure Investment Bank and the New Development Bank to name a few. Hence, the share of infrastructure in incremental bank credit is likely to decline, further impacting credit growth.
Since the economic recovery ahead is likely to be fragile, and there are expectations of lower interest rates, industrial capex investment decisions are also likely to be reduced or kept on hold. The outlook for prices of global commodities is also soft, which would result in relatively lower working capital demand from companies. Against this backdrop, credit growth may fall from 12.6% in FY15 to 10.5% or 13% in FY16 or FY17, led by delayed capex plans, gradual de-leveraging of companies and deflated commodity prices.
Role of CASA
Banks with a high proportion of low-cost deposits are expected to be better placed when it comes to managing their net interest margin (NIM). In the private sector, banks with a high share of current and savings accounts (CASA) are likely to experience limited erosion to NIM. In the public sector, too, banks with a relatively better CASA share are also likely to see limited erosion to NIM, compared to their public sector peers. While banks with wholesale liabilities could benefit from falling interest rates in the interim, those which maintain a high CASA share have NIMs that are sturdy and less volatile to interest rate cycles, thereby protecting their profitability.
Worry lines
Asset quality concerns may persist in the near term, driven by slower-than-expected economic recovery, declining commodity prices and slow corporate de-leveraging. An extended global slowdown, coupled with a subdued capital market and lower inflows, could further delay asset quality recovery. In addition, the Indian rupee could see further decline (5-10%), which would impact debt servicing capabilities of companies, particularly where foreign currency loans are not hedged.
Sectors such as power, infrastructure, iron and steel, metals, construction and textiles are still facing problems with their operating environments. While recent initiatives show positive intentions of the government and the Reserve Bank of India to arrest the slide in asset quality, this will take a while to manifest fully into earnings improvement.
Weak credit demand, modest NIMs and fee-income are likely to keep pre-provisioning profit growth in check. While trading gains could aid profitability, it is unlikely to be meaningful, as banks have a lower-than-past share of Statutory liquidity ratio (SLR) investments with reduced duration. While fresh non-performing assets (NPAs) could fall with slower credit growth, elevated credit costs may persist due to ageing of the credit portfolio, impacting profits. Despite these challenges, return on assets are expected to remain largely flat ahead, and lower leveraging capabilities of most banks would limit return on equity, compared to the previous credit cycle.
Edited excerpts from Banking & Financial Services: A long and arduous wait for recovery, stay selective, by Emkay Global Financial Services Ltd.
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