RUN-UP TO THE BUDGET: BANKING. Stockwatch: Stressed assets, poor loan growth blot banks’ books

It was a sombre year for banking stocks. Optimism of an economic recovery waned since the last Budget, and so did the buoyancy in stocks.

The Nifty Bank Index has fallen about a quarter since the previous Budget. The fall in PSU bank stocks has been steeper, with the Nifty PSU Bank Index plummeting more than 40 per cent. While poor financial performance dragged down the stocks of PSU banks over the year, a few private bank stocks too lost steam, owing to the sudden spike in bad loans.

Loan growth for the banking system slipped to decadal low levels of 8-9 per cent, and stayed there for most of last year. This weak credit offtake was led by PSU banks that hold over 70 per cent of the loans.

In the past three-four years, PSU banks have grown far more slowly than their private counterparts because of their huge exposure to the corporate segment (40-50 per cent of loans).

Weak investment activity has led to below industry growth for most PSU Banks, with 6 per cent loan growth for the first half of this fiscal.

Private banks, on the other hand, continued to show resilience and grew their loan book over 20 per cent, thanks to the healthy growth in retail loans.

HDFC Bank, for instance, grew its loan book 26 per cent in the December quarter, while ICICI Bank and Axis Bank delivered 20-21 per cent growth.

But the rising stockpile of bad loans and restructured assets, which had mainly been a concern for PSU banks, weighed on earnings of select private banks as well. ICICI and Axis Bank have seen no let-up in asset quality pressure.

The RBI’s asset quality review, which has forced banks to declare certain accounts as NPAs, have added to these banks’ woes.

Leading PSU banks are yet to declare their December quarter results and hence the extent of impact that the RBI’s move will have on them needs to be seen.

For the six months ended September, the earnings of most PSBs fell sharply owing to higher provisioning of bad loans. Stressed assets — bad loans and restructured assets — remain above 11 per cent levels. The new lending norms, which will be effective April, are likely to add pressure on margins of both PSU and private banks.

A revival in investment activity can help ease some of the asset quality pressures and boost earnings.

A pro-growth Budget, stimulating investments in infrastructure and boosting consumer demand, will benefit the banking sector.