Banking Stocks Face Uncertain Future Amid COVID-19 Pandemic

Strategic Insights -

The COVID-19 pandemic and subsequent moratorium on loan repayments have raised concerns about a fresh wave of bad loans for Indian lenders. Despite the Reserve Bank of India's (RBI) surprise rate cut and extension of loan repayment moratorium, banking stocks remain under pressure. Analysts warn that every bull market has a leader, and banks may not be the top performers this time around. With GDP growth expected to be negative, banking stocks are likely to suffer.

Key Takeaways:

  • Banking stocks have eroded 45.70% of their value so far this year, with all bank stocks losing 20-75% of their value.
  • Of the 41 listed banks, nearly half have lost more than 90% of their value from their record highs, with top private banks being relatively better placed.
  • The lockdown has significantly hit businesses and eroded consumption power, leading to decreased ability to pay back loans.
  • As of December 31, 2019, Indian banks collectively had nearly Rs 9 lakh crore non-performing assets (NPAs).
  • COVID-19 may create fresh slippage of up to Rs 5.5 lakh crore in a stressed case scenario, according to India Ratings.
  • Banks have parked close to Rs 7-8 lakh crore of excess funds with RBI on reverse repo window, as they have turned risk-averse to lending.
  • RBI on Friday trimmed India's growth forecast for FY21, expecting GDP growth to remain in the negative territory with some pickup in the second half.
  • Banking stocks are a proxy to underlying GDP growth in the economy, and with GDP growth expected to be negative, banking stocks are likely to suffer.
  • Banks are still better placed than their counterparts non-banking finance companies (NBFCs) due to their deposits and lower liquidity problems.
  • Government must address concerns of the banking sector to avoid a cascading impact on the economy.

Statistics:

  • Banking stocks have lost 45.70% of their value so far this year.
  • 20-75% of bank stocks have lost value so far this year.
  • Rs 9 lakh crore: Collective non-performing assets (NPAs) of Indian banks as of December 31, 2019.
  • Rs 5.5 lakh crore: Potential fresh slippage of bad loans due to COVID-19, as estimated by India Ratings.
  • Rs 7-8 lakh crore: Excess funds parked by banks with RBI on reverse repo window.
  • 41: Number of listed banks in India.
  • 50%: Hope for 50% of earnings growth to come from banks before COVID-19 crisis.

Sources:

  • Reserve Bank of India (RBI)
  • Abhimanyu Sofat, head of research at IIFL Securities
  • Ajay Bodke, CEO-PMS at Prabhuas Lilladher
  • Kunj Bansal, Partner & CIO, Sarthi Group
  • India Ratings
  • Times of India