1 min read.Updated: 24 Aug 2021, 10:15 PM ISTAparna Iyer
Lenders such as State Bank of India, HDFC Bank and ICICI Bank have won over investors despite a spike in stress
A critical factor that differentiated strong, vulnerable and weak banks is the extent of provisions lenders have made towards the impact of the pandemic. Within this, buffer provisioning—which is over and above the regulatory requirement—has made a big difference in terms of valuations for lenders.
Indeed, lenders such as State Bank of India (SBI), HDFC Bank and ICICI Bank, despite a spike in stress, have won over investors due to their high provisions.
Other private sector lenders that investors warmed up to were Axis Bank, Kotak Mahindra Bank and IndusInd Bank.
The lenders have one thing in common—high provisions.
As the adjoining chart shows, ICICI Bank wins hands down on the extent of buffer provisioning it has against stressed loans. The private sector lender has a buffer provision of 1.2% of its loan book as against a restructured loan pile of just 0.5%.
ICICI Bank’s shares have outperformed the sector index by a wide margin so far in 2021. True, the lender has multiple positives besides provisioning that support its valuation.
Close competitor Axis Bank, too, has been able to boost investor interest through prudent provisioning. Conservative lender Kotak Mahindra Bank’s valuation has also drawn considerable support from the protection of provisioning.
Does that mean that these lenders are not vulnerable to the pandemic anymore? The answer is not a straight yes, here.
To be sure, the impact of another potential covid wave and possible lockdowns is still unclear. As such, loan growth has decelerated at the industry level, dragging incomes of most lenders.
Furthermore, some lenders had dipped into their buffer provisions to offset the impact of the second covid wave on asset quality.
Analysts at Jefferies India Pvt. Ltd expect provisions to fall in FY22 for banks as fresh stress emerges from the pandemic. This would mean that credit costs may also temper for banks.
“If lenders utilize buffer provision, it could lift our earnings forecasts as we haven’t factored these in earnings," a Jefferies report said.
The upshot is that proactive provisioning by lenders meant valuations remain unscathed during the second wave. From here on, though, the pace of stress pile-up would determine how safe the lenders are.