Wednesday, January 25, 2017

India: Moody’s and ICRA See “Subdued” Prospects for India’s Banks

Sometimes Even When You See Something Clearly, You Think It Wise to be Indirect

Just when I was recovering from The National Bank of Ukraine’s festival of euphemisms about PrivatBank, along come Moody’s and its Indian affiliate ICRA to once again remind AA that his attempts are easily upstaged. 

In a report released on 9 January, Moody’s and ICRA summarize their conclusions about the country’s banking sector with the phrase “see subdued prospects for India's banks“.
Why is AA “skeptical” and inclined to a stronger term than “subdued”?  Perhaps “dismal”?

Three factors.
First, Indian banks—particularly public sector banks or PSBs—have a reputation for under-reporting NPAs.    Favorite techniques were refusal to recognize NPAs, disguising bad loans via restructuring and/or making new loans to pay interest on past due loans.   Former RBI Governor Raghuram Rajan launched a “crackdown” in 2015 to curb under-reporting of NPAs. 
Performance suffered.  The decline was chiefly due to increased provisioning in 2016 and the related impact on net interest margin.   According to RBI’s Report on Trends and Progress of Banking in India,  Operations and Performance of Scheduled Commercial Banks Table 2.1, banking sector return on assets for 2015/2016  was 31 bp and ROE 3.59% compared to 2014/2015’s ROA of 81 bp and ROE of 10.42%.   Public Sector Banks—some 70% of banking assets--fared even worse with negative ROA and ROE in 2015/2016.  
Second, Indian banks have also traditionally under-reserved their declared NPAs with provisions averaging roughly 40% of total NPAs.   According to RBI Handbook of Statistics of the Indian Economy Table 65, 2015 reserving levels were at 46%.   Unreserved NPAs were some 20% of 2015 capital (Table 64). 
It’s hard to tell what happened in 2016.  Much higher provisions were taken, but more loans were recognized as NPAs and restructured loans are now to be included in that figure.  What’s the net effect?   
Sadly, RBI data on NPAs is available with a roughly 12 month lag.   See Table 65 in the RBI’s “Handbook of Statistics”.  Latest figures are from September 2016.  Other RBI reporting has detailed bank-by-bank analysis but the latest data appears to be March 2016. 
Without RBI statistics on both NPAs and provisions, it’s not possible to determine if the provision coverage has increased because both NPAs and provisions have increased.  
Third, low provisioning levels are particularly important because NPA recovery is traditionally very low in India.  According to RBI’s Report on Trends and Progress of Banking in India,  Operations and Performance of Scheduled Commercial Banks, Table 2.2,  in 2016 Indian banks recovered roughly 10% of NPAs versus 12% for the previous year.  
What this means is that recoveries are unlikely to make up provisioning shortfalls to any meaningful extent.   Provisions then are more critical than in jurisdictions where average recoveries are in the 40 to 50% range. 
It’s hard for AA to imagine that during 2016 Indian banks cured decades of bad practice and bad underwriting.  Trump Tower like Rome wasn’t built in a day, though it is by some Twitter accounts better.  And banking sector cleanups generally take more than a single year. 
Moody’s/ ICRA seem to agree. In their press release, they project single digit ROE for 2017 and 2018 and note large capital needs particularly among PSBs. 
A case of JPMorgan “Jakarta” fever?  Or euphemism?  
And finally a tip of AA’s enormous tarbush to ICRA SVP Karthik Srinivasan for combining “dent” with “profitability matrices”.  See link to Moody’s / ICRA press release. Shabash!

1 comment:

Abu 'Arqala said...

If you've been following earnings announcements, you may have noticed that ICIC Bank (#2 lender by assets in the RoI) had what is a no doubt "subdued" Third Quarter with profits down some 19% and NPAs up.

http://in.reuters.com/article/icici-bank-results-idINKBN15F12W


Also earlier this week, Partha Ray ; Rakesh Mohan's IMF Working Paper on the Indian financial sector was released.

Here's a quote from page 15.

" The issue of recent deterioration of asset quality in public sector banks has emerged as the key concern surrounding the banking sector today. Earlier, gross non-performing assets (GNPAs) of the Indian banking sector, as a percentage of gross advances, had come down from 15 percent in 1998 to 3.3 percent in 2009: since then GNPAs have increased steadily to 5.1 percent by the end of 2015 (Figure 6). Taking a wider definition, the stressed assets (i.e.,gross NPA plus restructured standard assets plus written off accounts) for the banking system as a whole increased from 9.8 percent in 2012 to 14.5 percent in 2015; stressed assets in public sector banks increased from 11.0 percent to 17.7 percent during the same period (Mundra, 2016a, 2016b). "

Full text at http://www.imf.org/en/Publications/WP/Issues/2017/01/20/Indian-Financial-Sector-Structure-Trends-and-Turns-44554