Banks India Banks – Expect a bumpy ride ahead

Credit to GDP ratio to remain weak. Our analysis of macroeconomic parameters' impact on loan book growth shows slowing GDP growth impacts Indian banks' loan growth. With expected GDP slowdown, we expect loan growth to slow further.

30 Mar 2020

Loan growth/nominal GDP remains weak

Source: CEA, RBI

Earnings risk higher than GFC and demonetization

In this note we present scenarios to analyse COVID-19 since the impact on financials would depend upon the period of lock-downs and then the time taken for activities to resume. The UBS economics team has now cut India's GDP growth to 4.0%/5.8% in FY21/22E. While we were cautious on corporate asset quality, UBS Evidence Lab data suggests the NPL risk is likely to spread to all segments. In our base case we assume the current lock-down to be in line with the government's announcement of up to 15 April, with another three to four months to reach normalised activity. We think Indian banks' earnings are at greater risk than during demonetisation (2016-17) or the Great Financial Crisis (2008-09) and expect government action (economic stimulus and regulatory relaxation) in the coming months that could reduce the impact.

Recap risks: Large private-sector banks have 800-1,200bp cushions

Lock-downs and resultant losses of revenue/EBITDA are likely to lead to increased delinquencies. We believe travel, tourism, real estate, hospitality, entertainment and businesses dependent on international trade are likely to be adversely impacted. We also expect retail loan growth and collections (partly) to be affected due to social distancing and lower discretionary spend. We believe banks exposed to the above would be hit the worst. As per our sensitivity analysis, large private-sector banks would not need equity capital till credit losses of 800-1,200 bps. Risk of deposit withdrawals by state-government departments from private-sector banks is additional pressure.

Downside depends on period of impact, regulatory action

In our downside scenario we assume a 60-90-day lock-down and nine to 12 months to return to normal activity. For India banks, we expect gross NPL formation (slippage) ratios of 7.1%/5.1% in FY21/22 (base-case), and 9.5%/7.1% (downside case). In our downside we also expect loan growth of -5%/2% in FY21/22. Risk aversion and a lack of pricing power are likely to impact NIM, in our view.

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