Credit Costs Could Be Higher than Current Forecasts

The credit cost conundrum has re-emerged after the recent decline in stock prices for lenders, suggesting that the impact from fresh lockdowns could be higher than current forecasts, according to a report by Kotak Institutional Equities (KIE). However, it kept its credit cost estimates largely unchanged while maintaining that the risk is a lot higher on loan growth for the frontline banks.

“We went with a view that the impact of Covid on asset quality is likely to linger for a much longer period because recovery in business conditions and resilience of borrowers would be different. Despite the government guarantee schemes and stronger-than-expected recovery in economy, we kept our credit costs unchanged after revising them in the fourth quarter of 2019-20 and first quarter of 2020-21,” said KIE, a division of Kotak Securities, in its report.

It added that the recent decline in stock prices after February 11 — when we had the lowest number of reported fresh infections —shows that the market is quite concerned about the second wave. “The frontline banks have corrected less than the mid-tier banks. We understand that the first quarter tends to have seasonality in collections so we are probably constrained from reacting immediately to the recent slowdown,” the report said.

“Within the large cap banks, we like ICICI Bank and Axis Bank over HDFC Bank. A combination of a loan portfolio that is less risky and sharp reduction in credit costs with less variability than before is driving this investment thesis,” it stated. 

The report further said that the corporate NPL book is well provided, which could give way to a credit cost that is lower than currently forecasted. “Within the mid-cap banks, we like Federal Bank and in small cap banks we like DCB Bank,” it added.

KIE said the recent lockdown in various locations would be of a shorter time period than last year, resulting in lower economic impact.