Investors take a shine to banks, but EM comparison doesn’t flatter2 min read . Updated: 01 Dec 2020, 10:00 PM IST
When compared with other emerging market peers, Indian banks may not shine when it comes to key metrics such as capital and asset quality. Moody’s Investor Services Ltd expects Indian banks to report large erosions in capital in calendar 2021.
India’s banking stocks have outperformed the broad market and even regional peers in November.
The MSCI India financials index was up 16% as against a 9% gain in the emerging market index, according to Jefferies India Pvt. Ltd. The domestic Nifty gained around 9% in the same period.
The sentiment seems to be further buoyed with a favourable gross domestic product (GDP) print last week.
Indeed, the prospect of a milder contraction of the Indian economy in FY21 has come as a relief to the country’s banks, given the positive implications on asset quality.
But when compared with other emerging market peers, Indian banks don’t shine in key metrics such as capital and asset quality.
Delinquent loans were more than 8% of total credit in 2019 for Indian banks, one of the highest among Asian countries, according to Moody’s Investor Services Ltd.
What’s more is that Moody’s expects Indian banks to report large erosion in capital in calendar 2021.
“NPLs (non-performing loans) will rise most for banks in India and Thailand because of the greater shock to their economies and the historically poor performance of certain loan types," said a report from the global rating agency.
A recession is not helping banks’ cause. Even though the GDP may shrink less than feared, it may shrink nonetheless in FY21.
A recession has a two-fold impact on bank balance sheets: asset quality and credit growth.
Improving collections and favourable commentary from bankers has improved the outlook on asset quality. But investors need to remember that asset quality visibility is impaired due to forbearance.
Restructured loans may not be as high as anticipated, but such loans need not be considered non-performing this time unlike normally when they are labelled as bad and provided for.
In short, banks will see stress increase on their books, although the entire pile of stress may not be viewed as compromised. Historically, such selective labelling has hurt banks more.
The next is credit growth and here the writing is on the wall.
While credit growth has improved since the coronavirus lockdowns ended, it is still at a low 5.8% year-on-year as of 6 November.
A part of this loan growth is propped up by the government’s guarantee scheme for small businesses that takes away the risk of lending to such firms. Adjusted for this support, loan growth may plummet more.
India is still among the worst-performing economies among emerging markets. Financial stocks across markets have risen and India is not an outlier. However, the sharp gains in India’s bank stocks vis-a-vis those of peer markets warrant caution.