What will be the fallout of the coronavirus-induced downturn on banking and insurance sectors?
The immediate impact for both banks and the insurance sector would come in terms of sales or business growth because of their inability to be there in front of customers. No matter how well equipped digitally you are, at the end of the day, a lot of deals also get signed with the help of physical presence. That not being there would definitely cause problems. Similarly, in case of insurance, which is usually sold and not bought, many these products like par, non-par and protection products need agents to visit physically to sell those products. So, immediate impact is definitely going to be in terms of sales and that can definitely come down quite significantly. The other impact would definitely be in terms of nonperforming loans (NPLs) and consequently credit costs. It is difficult to send staff for recoveries, specifically for borderline cases. Lot of other sectors like tourism, aviation and SMEs will get affected because of the crisis. So, definitely, there are higher NPLs expected from that segment in case the Reserve Bank of India (RBI) doesn’t come up with sufficient regulatory forbearance.
Do you expect the RBI to cut rates?
In an environment like this, rate cuts alone cannot stimulate any kind of demand. What is more required from the RBI is to provide enormous liquidity to the entire financial system rather than actually doing rate cuts, which take more time to translate eventually at the borrower level. For SMEs and various beleaguered sectors like aviation and tourism, the RBI has to come up with various relaxations when it comes to regulation of NPLs and even disbursal of loans. A rate cut definitely be done, minimum it should be anywhere between 50 basis points and 75 basis points in the next policy.
Are there any specific banks which will be affected more than others?
The impact is going to be felt in two ways. One is the liabilities franchise considering there is a lot of fear among depositors. The YES Bank crisis, coupled with COVID-19, will also result in customers trying to hoard money or liquidity. They would like to be a bit more careful as to where they are putting their money. Banks, which have very weak liabilities franchise, could possibly be impacted in the near term. Other exposures could be more in terms of banks, which have an exposure to small and medium enterprises, NBFCs that are more exposed to SMEs and the auto loan sector. NBFCs also have a weaker liability franchise because they rely on wholesale markets for borrowing. The impact is going to be felt on banks, which have weaker liabilities and have exposure to the SME as well as the auto loan sector.
People are surprised by the surge in YES Bank shares. Is the worst over for the stock?
You may see further increase in NPLs. They do have a large SME 1 and SME 2 portfolio closer to Rs 14,000 crore. More stress is yet to come and there will also be more capital to be raised and secondly, the employee morale and the motivation of the employees and the ability to do business get affected.
Why has HDFC Bank underperformed in this market?
The worry in HDFC Bank is the fact that the unsecured loans obviously have been growing at a very fast pace and the recent lockdown would result in more job losses and eventually people will tend to default more on unsecured loans. The worry is that HDFC Bank can see a spurt in NPLs because of the unsecured loans category. But the worries are exaggerated because the lending has been done to salaried employees and a large proportion of the unsecured loans has been sold to internal customers, those with whom they have a liability profile.
The succession worry still remains unless the market gets a clarity on who is going to lead the bank — whether it is internal or external. There will be some nervousness. Anybody who takes over at the bank doesn’t inherit a bad legacy unlike in other banks where clearly they are taking over a bad book. The challenges are beyond three years when the bank will have to innovate and try to take steps to stay ahead of competitors. The worries are exaggerated.
IndusInd Bank has sharply tanked in the last one month. How much more pain is there for the stock?
The comparisons of IndusInd Bank with YES Bank are unwarranted because unlike YES Bank, IndusInd Bank is very well-capitalised, its CET 1 is above 13.5%, compared to YES Bank which is closer to 8%.
The other aspect is that IndusInd Bank has a granular retail portfolio which was more than 55% of the portfolio compared to YES Bank, which hardly had anything in retail. While there are some problems in the corporate franchise, the magnitude or the quantum of problems, which IndusInd Bank faces, is far lower than what YES Bank faced, considering that it has a larger retail portfolio. There are worries, but then the stock price now more than adequately factors in all those concerns.
Views expressed by the author are his personal views and do not represent Macquarie’s views.
The immediate impact for both banks and the insurance sector would come in terms of sales or business growth because of their inability to be there in front of customers. No matter how well equipped digitally you are, at the end of the day, a lot of deals also get signed with the help of physical presence. That not being there would definitely cause problems. Similarly, in case of insurance, which is usually sold and not bought, many these products like par, non-par and protection products need agents to visit physically to sell those products. So, immediate impact is definitely going to be in terms of sales and that can definitely come down quite significantly. The other impact would definitely be in terms of nonperforming loans (NPLs) and consequently credit costs. It is difficult to send staff for recoveries, specifically for borderline cases. Lot of other sectors like tourism, aviation and SMEs will get affected because of the crisis. So, definitely, there are higher NPLs expected from that segment in case the Reserve Bank of India (RBI) doesn’t come up with sufficient regulatory forbearance.
Do you expect the RBI to cut rates?
In an environment like this, rate cuts alone cannot stimulate any kind of demand. What is more required from the RBI is to provide enormous liquidity to the entire financial system rather than actually doing rate cuts, which take more time to translate eventually at the borrower level. For SMEs and various beleaguered sectors like aviation and tourism, the RBI has to come up with various relaxations when it comes to regulation of NPLs and even disbursal of loans. A rate cut definitely be done, minimum it should be anywhere between 50 basis points and 75 basis points in the next policy.
Are there any specific banks which will be affected more than others?
The impact is going to be felt in two ways. One is the liabilities franchise considering there is a lot of fear among depositors. The YES Bank crisis, coupled with COVID-19, will also result in customers trying to hoard money or liquidity. They would like to be a bit more careful as to where they are putting their money. Banks, which have very weak liabilities franchise, could possibly be impacted in the near term. Other exposures could be more in terms of banks, which have an exposure to small and medium enterprises, NBFCs that are more exposed to SMEs and the auto loan sector. NBFCs also have a weaker liability franchise because they rely on wholesale markets for borrowing. The impact is going to be felt on banks, which have weaker liabilities and have exposure to the SME as well as the auto loan sector.
People are surprised by the surge in YES Bank shares. Is the worst over for the stock?
One of the reasons why the stock price has gone up is because there are restrictions with respect to selling. There is less liquidity available in the stock and therefore we can see such a sharp increase in the share price. There has been a lot of short-covering. There is a lot of retail activity which happens in the YES Bank stock. This has resulted in some of the massive rallies that we have seen in the YES Bank share price. There are several challenges.
You may see further increase in NPLs. They do have a large SME 1 and SME 2 portfolio closer to Rs 14,000 crore. More stress is yet to come and there will also be more capital to be raised and secondly, the employee morale and the motivation of the employees and the ability to do business get affected.
Why has HDFC Bank underperformed in this market?
The worry in HDFC Bank is the fact that the unsecured loans obviously have been growing at a very fast pace and the recent lockdown would result in more job losses and eventually people will tend to default more on unsecured loans. The worry is that HDFC Bank can see a spurt in NPLs because of the unsecured loans category. But the worries are exaggerated because the lending has been done to salaried employees and a large proportion of the unsecured loans has been sold to internal customers, those with whom they have a liability profile.
The succession worry still remains unless the market gets a clarity on who is going to lead the bank — whether it is internal or external. There will be some nervousness. Anybody who takes over at the bank doesn’t inherit a bad legacy unlike in other banks where clearly they are taking over a bad book. The challenges are beyond three years when the bank will have to innovate and try to take steps to stay ahead of competitors. The worries are exaggerated.
IndusInd Bank has sharply tanked in the last one month. How much more pain is there for the stock?
The comparisons of IndusInd Bank with YES Bank are unwarranted because unlike YES Bank, IndusInd Bank is very well-capitalised, its CET 1 is above 13.5%, compared to YES Bank which is closer to 8%.
The other aspect is that IndusInd Bank has a granular retail portfolio which was more than 55% of the portfolio compared to YES Bank, which hardly had anything in retail. While there are some problems in the corporate franchise, the magnitude or the quantum of problems, which IndusInd Bank faces, is far lower than what YES Bank faced, considering that it has a larger retail portfolio. There are worries, but then the stock price now more than adequately factors in all those concerns.
Views expressed by the author are his personal views and do not represent Macquarie’s views.
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( Originally published on Mar 26, 2020 )
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