Home >Markets >Mark To Market >Analysts expect large lenders to tide over the second wave better

India’s banks had a tumultuous FY21 with loan growth collapsing and stress increasing on their balance sheets due to the pandemic. But the virus has separated the resilient from the not-so resilient lenders.

Analysts are now betting that large lenders that weathered the first covid wave would ride out the second one, too, without much damage.

HDFC Bank Ltd’s March quarter performance gives credence to this expectation, even as the lender’s loan growth suffered, especially the retail loan segment. But the bank was able to keep its enviable asset quality from deteriorating. Stressed loans remained low with gross bad loans forming just 1.32% of the book, not very different from past quarters.

“Between risk to growth and credit costs, we believe that the former is higher for the larger banks, while the latter is higher for mid-tier and smaller banks," wrote analysts at Kotak Institutional Equities Ltd in a note.

Analysts added that it would be a challenge for mid-sized lenders to return to the fast-paced loan growth trajectory that supported their premium valuations before the covid pandemic. These challenges have only increased in the wake of the second wave.

What works for large banks is the profile of retail borrowers as well as a large share of corporate loans in their portfolio.

Lenders such as ICICI Bank Ltd, Axis Bank Ltd, State Bank of India Ltd and HDFC Bank have a large proportion of secured and salaried individuals as borrowers.

Although some stress is inevitable given instances of job loss or wage cuts, this profile has exuded limited stress, mostly.

Moreover, lenders such as ICICI Bank and Axis Bank have a large share of corporate loans in their portfolio. Companies have deleveraged to a large extent before the pandemic and stress has reduced here. This may help the lenders keep up their asset quality.

Of course, small business loans may continue to face stress following the second wave and curbs on mobility.

Analysts at Nomura expect forbearance for these loans to be extended, which will help the asset quality of lenders.

“The second wave impairs the same economic agencies and segments as the first one. We are aligning to the view that regulatory forbearance and fiscal support will need to be extended further. As a result, the ultimate asset quality fallout will likely get pushed out even further," Nomura analysts wrote in a note.

The second wave has tempered expectations over loan growth and increased worries over asset quality.

While shares of mid-sized banks have surged more than their larger peers, returns of the latter have outperformed the former over three- and five-year horizons. The outlook from respective managements that would accompany the details of the March quarter performance of lenders will determine whether this gap gets narrowed.

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