Financials: Asset Quality Improving Steadily: Motilal Oswal

Banking system asset quality has witnessed significant improvement over recent years with GNPA/NNPA ratio declining to 6.9%/2.3% as on Sep-21, Motilal Oswal has said in a report.

According to the firm, the APCR ratio for system thus improved 2,000bp over FY18-Sep'21 to 68% vs 48% in FY18. While the improvement in asset quality ratios since FY18 looks similar to recovery witnessed during early 2000s, the current improvement has kept pace despite COVID-19 impact and slower loan growth with systemic loans growing at 8% CAGR over FY18-22E vs 22% CAGR witnessed during FY01-05 period.

"While we remain watchful of restructured portfolio and asset quality trends in SME segment, we nevertheless estimate GNPA ratio for our coverage universe to moderate to 4.2% by FY24E while NNPA ratio touches decadal lows of 1.3% by FY24E.

Strong capitalization levels will enable dilution free growth as we estimate system loan growth to sustain at 13% CAGR over FY22-24E. We thus estimate earnings for our coverage universe to grow at 28% CAGR over FY22-24E leading to improvement in return ratios," the brokerage has said.