PSU Bank Balance Sheets Healthy Enough To Start Growing Again: BofA Securities

Fiscal 2021-22 was a “watershed year” for public sector banks, with balance sheets of these lenders now strong enough to focus on growth, according to BofA Securities.

With improved asset quality and loan and deposit growth picking up, some of the larger government-owned lenders could see a ‘re-rating’ on the stock markets, the research house argued in May 23 note.

“…after a long asset quality cycle, their balance sheets are now healthy enough to start growing again,” analysts Anand Swaminanthan and Madhur Sharma wrote. “Overall, this will likely drive system loan growth to improve sustainably to trend 12-13% levels (from 10% now).”

What Changed In FY22?

According to BoA Securities, a few crucial changes came about in the recently concluded financial year:

  • Loan growth stood at 8.8%, the highest since FY14. To be sure, it remains well below the 16% growth shown by private peers. Deposit growth also improved, rising 8.4% year-on-year.

  • Net interest margins for these banks are back at record highs, thanks to improving loan growth and asset quality.

  • Bad loan coverage for these lenders is now at 75%.

  • Capital, as measured by Common Equity Tier-1 ratio, has improved for most banks, with the exception of State Bank of India.

  • However, return on equity for these lenders is still sub-par and below the cost of equity.

Ready For Growth?

Against that backdrop, banks are now guiding for in-line/better-than-system growth for FY23. “Though corporate capex is yet to pick up, pent-up demand in retail and migration from bond/capital market to debt for funding will drive growth in FY23,” said the analysts.

The improved credit growth, together with higher asset yield in the coming quarters, could also help push up lending margins for these banks, they said. “As rate cycle has started to pick up, loan yield will increase given higher share of floating rated book and could help expand NIMs.”

Public sector banks are also now much closer to private peers in terms of net non-performing assets. State Bank of India is the strongest in this regard.

Eventually, these tailwinds could mean that core profitability of public sector banks will improve, BofA Securities said. “PSB core profitability (pre-provisioning operating profit RoA & core RoA) are back to peaks last seen in FY14-15, but gap with private banks remains wide posing scope for improvement.”

That’s not to say that public sector banks don’t have challenges to face.

With growth picking up, these lenders may need more capital but the markets may not be conducive. Also non-interest income may remain under pressure and competitive pricing could depress margins.

Finally, a full picture of asset quality may only emerge once loans given under the emergency credit line guarantee scheme come out from under moratorium. While the government has guaranteed the incremental lending to these accounts, should a borrower default, it may have an impact on its non-guaranteed outstanding loans as well.

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