March 9, 2021 (MLN): The banking sector delivered a much better than expected performance on loan quality in a tumultuous CY20, indicating that the pandemic has not yet made a significant dent on asset quality as the total Non-performing loans (NPLs) of the private banking industry (representing 55.4% of total industry advances, excluding HMB) surged by 6.8%, in line with yearly historical averages, attributable to a timely response by SBP.
According to the report by AKD securities, this also has provided banks having international operations much-needed space to absorb delinquencies on international loan book largely imputed to a single large party (+3.8% in 9MCY20 in US$ terms). However, a sharp downtick in these NPLs in US$ terms in the final quarter (down 2.6%QoQ) can be taken as an indication of the near-term trend in the overseas NPLs.
On the domestic front, the loan book reflected exceptional resilience in most parts of the year with total NPLs jumped by 3.3% in 9MCY20 however, the final quarter witnessed an uptick of 4.4% which could be allocated to a single OMC play being classified industry-wide.
The report holds a comfortable view on domestic asset quality as the relief period expires. As per the management of the banks, after aggressively building up loss reserves in 2Q and 3Qs (currently. Rs 18.4 billion or 0.5% of gross advances), banks either opted to reduce the pace of accumulation or partly reverse provisions eyeing improved economic performance, the report cited.
The overall cost of provisioning stood at 1.6% in CY20, the highest since CY13 which is expected to normalize going forward even after the expiration of the relief period. This assumption is based upon heightened economic activity particularly in real estate translating into improved recovery prospects for the banking industry as indicated by the recovery ratio in 4QCY20 standing at 2.2%, the highest quarterly average since Dec’17, the report highlighted.
Moreover, improving business outlook distinctly in the textile space is likely to make debt swap arrangements feasible as seen in HMB where non-banking assets jumped Rs 2.6 billion in Sep’20 vs. Rs 414 million in Jun’20.
Thus, potential reversals in credit charges could help in offsetting any fresh NPL accumulation, as per the report. In addition, while the Central Bank is expected to cease its forbearance measures as the timeline ends, the possibility of SBP providing reliefs to a particular sector/company cannot be ruled out, affecting the banking industry as a whole as we have seen in the past.
Since the banking sector has underperformed the market by 4.1% despite heavy dividend payout, bank stocks deteriorated investor sentiments. However, the current bull-cycle in commodities spurring concerns on inflation and external account and increasing market expectation of an eventual rate hike by the Central Bank could bring the sector into the limelight, going forward.
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