RBI<\/a>\u2019s reverse repo window. A closer look at flow of resources to the commercial sector clearly reveals that bank credit has been the biggest reason behind a precipitous fall \u2013 60% y-o-y decline to Rs 4 trn for 1HFY20. Latest data from two corporate-heavy banks, ICICI and Axis, which funded a substantial part of their capex cycle last decade, clearly reveals that ~90% of incremental lending in the last couple of years has been to corporates rated A and above. So if banks aren\u2019t going to lend, how will capex and infra cycle pick up? And how will credit growth recover? Add to that, banks have been telling us that utilisation of working capital limits have gone down. All that has affected credit growth.<\/p>\nRBI\u2019s financial stability report predicts further increase in NPLs:<\/strong> The single biggest takeaway from RBI\u2019s FSR is that they are expecting NPLs to increase by 60bp from 9.3% in Sep-2019 to 9.9% by Sep-2020. To put this in context, our NPL forecast for our coverage universe is a 130bp decline in FY21. While it is difficult to reconcile, as we don\u2019t know what recoveries (like Essar Steel, Bhushan Power, etc) RBI has factored in, or if there is also a denominator effect whereby lower credit growth could have resulted in a higher GNPA number, it suffices to say that if the current poor economic growth continues, downside risk to earnings estimates coming from lower loan growth and higher than expected credit costs does exist.<\/p>\nThe only saving grace is that NPL coverage has increased, which means credit costs will normalise \u2013 the magnitude is in question: Banks today have NPL coverage ratios of ~62% unadjusted for write-offs, which is healthy. RBI\u2019s FSR report clearly illustrates that recovery rates have gone up under the new bankruptcy law.<\/p>\n
Hence, we don\u2019t expect more ageing related provisions. While we believe credit costs will come down, there could be disappointments with respect to the pace at which they will decline.<\/p>\n
Outlook<\/strong>
Stick to quality names:<\/strong> HDFC Bank<\/a> and ICICI Bank<\/a> remain our top picks. We won\u2019t be buying any PSU banks. HDFC Bank\u2019s recent trading update reveals that quality private sector banks continue to outperform and gain market share.<\/p>\n\u00a0<\/p>\n
![\"private](\"https:\/\/images.financialexpress.com\/2020\/01\/1-157.jpg\")