Tides of 6.07.2015   

1.   Challenges for PSU banks remain despite uptick in economy. Fitch Ratings' said challenges for state-owned banks remain despite improving macro picture. "The performance of India's state bank sector remained challenged in FY15 (to end-March 2015), with continued pressure on asset quality and weak capital," according to Fitch Ratings' Indian Banks Report Card FY15. Capital needs are likely to increase substantially each year up until FY19, it said adding there were few indications of a meaningful recovery in earnings in the short-term, though stressed assets are likely to have peaked and NPL (non-performing loan) accretion is easing. "A difficult year for Indian banks in FY15 was characterised by weak credit demand despite a gradually improving macro picture. State banks in particular continued to face asset-quality pressures, falling profitability and weakened capitalisation on an adjusted basis," it said. System-wide loan growth, at 9.7% was the lowest over the past decade, and concentrated mainly in retail and farm credit. The system NPL ratio rose to 4.6 per cent of total assets from 4.1% in FY14, though the bulk of the deterioration was accounted for by restructured loans, as expected. Consequently, the broader stressed-assets ratio (which includes performing restructured loans) spiked to 11.1%, from 10%. "Nonetheless, the outlook for FY16 is more positive for Indian bank credit. The system-wide stressed-assets ratio is likely to begin falling against the backdrop of a more favourable economic environment. "Gross NPL accretion has already shown signs of deceleration, and we forecast GDP growth to gain momentum and rise to 7.8%," Fitch said.

2.    Kotak Bank expects up to 20% growth in corporate loan book in FY16. Even as big-ticket loan demand continues to be tepid, private sector lender Kotak Mahindra Bank is confident of maintaining up to 20% growth in corporate loan book this financial year. The demand will be split evenly between term loans of slightly longer duration as well as working capital loans, and has a bias towards taking balance sheet-led term-loan exposures wherein it sees a company's balance sheet strength to service the debt. It can be noted that the slowdown in corporate demand in the last few years has led to a lot of banks focusing on retail segment. The bank acknowledged that the demand is slower and attributed it to the sluggish economic growth due to which greenfield projects are not coming up and also disintermediation, wherein better-rated corporates are going to money market alternatives to raise money rather than from banks. The bank has not revised its conservative approach when it comes to segments like infrastructure which have reported problems in the past.  The corporate and investment banking vertical is not aimed at loan growth alone. The vertical is for focusing on the needs of a large corporate across financial services and will also help the bank earn fee income through services like debt capital markets and investment banking, he said. Kotak Bank had recently cut its base rate by 0.10%, taking its cumulative cuts to 0.25% during the fiscal. On fears of losing business to larger rivals like ICICI Bank, HDFC Bank and SBI who have lower base rates, Kotak Bank can compress its spreads over the base rate to book loans.