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Private lenders are seen trouncing state owned banks in recovery

The growing disparity between India's private banks and their state-backed counterparts is expected to be highlighted this earnings season, with investors looking for further evidence that players like HDFC Bank Ltd. are better positioned to increase lending once the country's second coronavirus wave subsides. Many shareholders will be looking for signs that private lenders have strengthened their already robust buffers, giving them greater leeway to increase lending in the case of a rebound. One measure is critical: private sector banks' market share in terms of loans increased to over 36% in 2020 from around 21% five years earlier.

Although the relaxation of asset quality standards and low borrowing rates will undoubtedly assist to prop up earnings, it may only be a temporary respite. Stressed loans remain elevated, and credit growth is approaching a six-decade low – all of which might worsen if lenders are able to label such loans as nonperforming beginning in 2023.

"We anticipate banks with a solid brand, a strong balance sheet, and excellent governance to outperform rivals in a pandemic-affected environment," said Bloomberg Intelligence analyst Rena Kwok.

With all eyes on the quarterly results, which began with HDFC Bank on Saturday, here are five crucial measures to keep an eye on to see how state lenders are faring:

When the coronavirus reappeared in April with a second wave, companies and employment were hit hard by the subsequent lockdowns, just as the economy was beginning to recover from the pandemic's first start last year. As a result, the Reserve Bank of India extended a debt restructuring package as activity limitations curtailed lending and exacerbated a liquidity shortage for firms. According to the most current statistics, India's top three private banks loaned roughly three times the average industry rate in the March quarter, while retaining superior asset quality than their state counterparts. Kwok expects any additional deterioration in asset quality in forthcoming reports to be disguised by higher profitability.

Private banks' price-to-book ratios, a measure of a company's worth to investors, were more than double that of state lenders, showing the trust they have in their capital buffers. The comparatively superior quality of their loan books also aided them is eroding the market share of most state banks, with the exception of the State Bank of India. State Bank of India is an anomaly. Shares of the Mumbai-based lender have risen 56 percent this year, beating rivals after the firm reduced loan slippages and increased bad loan reserves even as lending growth slowed dramatically. Investors will be searching for information on new problematic loans and provisioning for the most recent quarter.

The catastrophic second wave would wreak havoc on banks' asset quality in the retail and small and medium-sized business lending segments "Moody's Investors Service Inc. senior credit officer of financial institutions Alka Anbarasu warned. This will “delay asset quality enhancements that have been undertaken for the previous two to three years.”


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