4 Factors Ailing Banking Stocks Amid The COVID-19 Crisis

On Monday, banks and NBFCs (non-banking finance companies) were among the biggest losers on the Indian stock exchanges. ICICI Bank ended 10.56 percent lower, HDFC 9.98 percent down, HDFC Bank 7.89 percent lower, SBI was down 5.88 percent and NSE's banking index -Nifty Bank- closed 8.32 percent lower.

Apart from profit booking and weak sentiments in the global markets, there were some issues especially concerning the banking sector. Here are 4 such factors that are weighing on these stocks:

1. Ratings downgrade

On 30 April, Fitch Ratings downgraded the viability ratings (VRs) of four large Indian banks-State Bank of India (SBI), ICICI Bank, Axis Bank and Bank of Baroda (BoB). The credit rating agency said that the change in ratings comes due to rapid deterioration in the operating environment for banks in India due to the coronavirus pandemic and measures taken to contain its spread.

VRs of SBI, ICICI Bank and Axis Bank were downgraded from 'bb+' to 'bb' and that of BoB was downgraded from 'bb' to 'bb-'.

Fitch's VR is a measure of intrinsic creditworthiness of a financial institution and a reflection of the agency's opinion on the likelihood that the entity will fail.

2. Bad debts of Indian banks expected to double

Bad debts of Indian banks could double after the COVID-19 crisis brought the economy to a sudden halt, a senior government official and four top bankers told Reuters on Monday.

At the end of September 2019, non-performing assets (NPAs) of banks in the country had already touched around Rs 9.35 lakh crore, which is about 9 percent of their total assets. This percentage is expected to double to 18-20 percent of by the end of the current financial year as 20-25 percent of the outstanding loans face a risk of default, the report said.

As the nationwide lockdown continues for over 40 days, small and medium-sized businesses (MSMEs) are expected to be the worst hit. These businesses also make for nearly 20 percent of the overall credit of Indian banks.

The operations of these businesses are likely to not be fully open till June or July as all of India's largest cities fall in the red zone or high-risk zones, making operations difficult under stringent restrictions. These large cities are not only the highest contributor's to the Indian economy, but businesses in these cities account for over 75 percent of overall loans given by private banks like Axis Bank.

3. Operational issues

Banks and now even NBFCs have been allowed to operate branches with minimum staff and with precautionary measures of social distancing in place. However, this service sector's operations have been especially challenging as customers continue to visit branches for withdrawing money, including amount credited by the government to Jan Dhan account holders.

Last week, an employee of IDBI bank's Malad branch in Mumbai died of COVID-19, raising concerns over the vulnerability of banking employees who are repeatedly exposed to multiple customers on a daily basis.

Apart from insurance cover and compensation to the legal heirs in case of death, banks have to spend on reimbursements towards masks/sanitisers and also provide incentives to motivate employees to serve customers.

4. Additional fund needs amid increased provisions

To prepare themselves for what loan defaults in the future, banks have been increasing provisions and raising risk controls placed on new loans, among other measures. To meet these discrepancies, banks have also been seeking additional funds as India is likely to see a major fallout in its economic growth this financial year.

Axis Bank and Kotak Mahindra Bank have already announced their fundraising plans. NBFCs are also looking at issuing NCDs (non-convertible debentures) to raise funds.