SECTOR UPDATE

Banks
CRAR to shrink by ~80-95 bps
16 November 2023

Rakesh Kumar Aditya Bagdia Ronak Daga

Research Analyst Research Analyst Research Analyst
[email protected] [email protected] [email protected]
+91-22-4031 7106 +91-22-4031 7112 +91-22-40317173

B&K Securities is the trade name of Batlivala & Karani Securities India Pvt. Ltd.
Research Analyst SEBI Registration Number: INH300000211
SECTOR UPDATE

Banks

CRAR to shrink by ~80-95 bps

The regulator’s discomfort on specific segmental credit growth pace eventually led to rise in credit risk
weights
The RBI hasn’t been comfortable with the banking system’s persistent high credit growth in unsecured
retail credit and credit exposures to NBFCs since 2QFY22. The recent credit growth moderated in 1QFY24
post the regulator’s explicit mentions. SCBs’ retail credit growth has been at 18-21% during 1QFY23-1QFY24,
and cumulative retail credit growth in housing loans (HL), vehicle loans (VL), education loans (EL) and gold
& gold jewellery backed loans (GL) has been at 15-17% during the period. But retail credit growth (other than
the four retail segments) and credit card receivables grew by 25-29% and 31-36% YoY, respectively, during
the period.
The banking sector’s credit exposure (to NBFCs) growth accelerated to 31% in 2QFY23 (from 11% 3QFY22)
and remained elevated at ~34% YoY thereafter. In addition to this, NBFCs credit growth in unsecured retail
credit surged to ~50% YoY during 2QFY23-2QFY24 (from 12% YoY in 1QFY22). The RBI considers increased
dependence of NBFCs on banks for the lendable resources and NBFCs’ unsecured retail credit exposures
as a major cause of concern. The regulator has distinctly mentioned that it considers NBFCs’ unsecured
credit exposure as banking system’s exposures.
In our opinion, these above-mentioned reasons led to the RBI to take these regulatory measures by raising
credit risk weights on i) consumer credit (excl. housing loans, vehicle loans, educational loans, and gold &
gold-backed loans) and ii) banking system’s credit exposures to NBFCs.
Outstanding exposure to consume more capital now but return of capital and return on capital are
fixed
It’s important to note that the guidelines would be applicable on outstanding loans and new loans. Banks
could tinker with lending rates prospectively to adjust for their likely capital erosion. The outstanding loans
are already tied at specific lending rates, but the outstanding balances would consume more capital
now. The fixed-rate lending rates on unsecured retail credit would be tied for the certain amount of return
of capital (built-in credit default) and return on capital (RoA).
Impact analysis – PVBs/PSBs/Old-Gen. PVBs to witness CET I erosion by ~115 bps/~75 bps/~45 bps
As an impact analysis, our findings are three-folds i) as per our calculations, banking system’s CRAR
would fall by 80-95 bps (from 17% as on March 2023) and slightly more in core capital (CET I), ii) the credit
segments witnessing rise in risk weight have cumulative credit composition of ~22% and these segments
contributed ~5.5% YoY credit growth (on a weighted average basis), out of the total credit growth of 15.3%
YoY as on end-September 2023. We opine the system’s credit growth would be impacted subject to credit
demand elasticity at higher lending rates (to compensate for the dent in core capital) and iii) among the
PVBs, AXSB, ICICIBC, KMB and IIB would get adversely impacted as these banks witnessed higher market
share gains in unsecured retail credit. Large PVBs (barring HDFCB) would witness CET I erosion of 110-120
bps. Among PSBs, SBI, due to its Xpress credit (Rs 3.2 trn, 9.4% credit composition of gross global credit) and
UNBK would be impacted the most. Among the regional PVBs, adverse impact on CUBK, FB and KVB would
be minimal; their CET I could shrink by 40-50 bps.

2
SECTOR UPDATE
Banks

Capital calls by some of the banks

SBI had raised equity capital in FY13, FY16 and FY18, the bank’s Tier I capitals in the years prior to (FY13, FY16
and FY18) were at 9.5%/9.6%/10.4%, respectively. SBI’s current Tier I capital is at ~12.8% (incl. 1HFY24 PAT) and the
RBI’s measures could erode CET I by ~85 bps. Therefore, it appears that there’s no imminent requirement to
raise core capital now. But some of the mid-sized PSBs (BOI and INBK) planning to raise equity capital (to
reduce GoI’s equity stakes below 75%) could postpone their plans.

Impact on capital ratios

(Rs mn) Existing Increase in Revised CET 1 CET 1 capital Revised CET 1 Change in
RWAs RWAs RWAs (%) (%) CET I
PVBs
HDFCB 2,17,42,260 11,57,621 2,28,99,881 17.3 37,61,411 16.4 -87bps
ICICIBC 1,20,64,060 8,85,465 1,29,49,525 15.26 18,40,976 14.2 -104bps
AXSB 89,70,721 9,41,668 99,12,388 14.56 13,06,137 13.2 -138bps
KMB 40,60,352 2,35,943 42,96,295 20.3 8,24,251 19.2 -111bps
IIB 35,03,760 1,80,701 36,84,461 16.33 5,72,164 15.5 -80bps
FB* 16,93,930 61,793 17,55,723 13.79 2,33,593 13.3 -49bps
RBL* 8,94,820 70,356 9,65,176 15.15 1,35,565 14.0 -110bps
CUBK* 3,37,784 7,227 3,45,011 19.02 64,247 18.6 -40bps
KVB 5,43,140 22,631 5,65,771 15.19 82,503 14.6 -61bps
PSUs
SBIN 2,87,00,440 26,21,256 3,13,21,696 9.94 28,52,824 9.1 -83bps
BOB 74,38,980 3,85,033 78,24,013 11.57 8,60,690 11.0 -57bps
PNB 70,80,860 5,91,583 76,72,443 10.23 7,24,372 9.4 -79bps
CBK 61,53,080 4,26,910 65,79,990 11.58 7,12,527 10.8 -75bps
BOI 37,95,090 2,16,760 40,11,850 12.6 4,78,181 11.9 -68bps
UNBK 61,07,566 4,39,404 65,46,970 13.05 7,97,037 12.2 -88bps
INBK 35,37,190 2,08,608 37,45,798 12.07 4,26,939 11.4 -67bps
Source: B&K Research. *For FB, CUBK and RBL Tier I capital ratios have been taken and not CET 1 ratios.

Growth in unsecured retail growth and to NBFCs

Retail loan growth higher than total credit growth moderating from their peaks

Source: B&K Research, RBI

3
SECTOR UPDATE
Banks

Credit card and other personal loans proportion

NBFCs proportion to total credit stable to retail credit inching up

Source: B&K Research, RBI

ICICIBC, AXSB, IIB and FB registering higher growth PNB and BOB registering higher growth in
in unsecured retail book unsecured retail book

Source: B&K Research

Growth in credit cards and PL higher than historical BOB and UNBK registering higher growth in
rates unsecured retail credit

Source: B&K Research

4
SECTOR UPDATE
Banks

Bank’s Exposure to NBFCs

(%) Credit Gr. (Sep-20 to Sep-23) CAGR Change in Credit Composition
Banking System 3.7 0.7
PSUs
CBK 5.0 3.6
BOB 1.2 -2.5
SBIN 2.4 1.5
PNB 3.4 1.7
UNBK 4.2 2.1
INBK 2.5 0.6
PVBs
ICICIBC 6.8 1.7
HDFCB 6.7 -0.0
AXSB 4.3 0.3
KMB 5.1 0.4
IIB 11.5 2.9
FB 1.1 -1.6
RBL -1.0 -2.2

Banking sector exposure to NBFC Growth

Source: B&K Research

5
SECTOR UPDATE
Banks

State Bank of India Bank of Baroda

Source: B&K Research

HDFC Bank ICICI Bank

Source: B&K Research

Axis Bank Kotak Mahindra Bank

Source: B&K Research

6
SECTOR UPDATE
Banks

B&K Universe Profile – by AMFI Definition

140
120
120

no. of companies
100 86
80 72

60
40
20
0
Top 100 Next 150 Residual
(Large Cap) (Mid Cap) (Small Cap)

B&K Securities is the trade name of Batlivala & Karani Securities India Pvt. Ltd.

B&K Investment Ratings

LARGE CAP (Market Cap > USD 2 bn) MID & SMALL CAP (Market Cap < USD 2 bn)
BUY >+15% >+20%
HOLD +15% to -10 % +20% to -15 %
SELL <-10% <-15%
Disclaimer: This report was prepared, approved, published and distributed by Batlivala & Karani Securities India Private Limited (“B&K”) located
outside of the United States (a “non-US Group Company”), which accepts responsibility for its contents. It is distributed in the U.S. by Enclave Capital,
a U.S. registered broker dealer, on behalf of B&K, only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange
Act of 1934 (the “Exchange Act”) pursuant to the exemption in Rule 15a-6. Neither the report nor any analyst who prepared or approved the report is
subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research
reports or research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial
Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organization. Outside the United States, this report is distributed by B&K or an
authorized affiliate of B&K.
The report has been compiled or arrived from sources believed to be reliable and in good faith, but no representation or warranty, express or implied
is made as to their accuracy, completeness or correctness. B&K has not verified the factual accuracy, assumptions, calculations or completeness
of the information. Accordingly, B&K accepts no liability whatsoever for any direct or consequential loss or damage arising from (i) the use of this
communication (ii) reliance of any information contained herein, (iii) any error, omission or inaccuracy in any such Information or (iv) any action
resulting there from. B&K provides the information for the purpose of the intended recipient’s analysis and review and recipients are advised to verify
the factual accuracy, assumptions, calculations and completeness of the information.
This report was produced by B&K solely for information purposes and for the use of the recipient. It is not to be reproduced, redistributed under any
circumstances and is not to be copied or made available to any person other than the recipient. All estimates, expressions of opinion and other
subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly
higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may
be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By
accepting this document, you agree to be bound by all the foregoing provisions. This document does not constitute an offer of, or an invitation by or on
behalf of B&K or its affiliates or any other company to any person, to buy or sell any security.
The views of any Analyst reflected in this report are given in compliance with the Research Analyst Regulations, 2014. All analysts covering the
securities/ companies mentioned in this report have complied with the appropriate set of rules, regulations & procedures in their detailed coverage
report(s) of the respective securities/companies. It is important to note that any dispute with respect to this Research Report, would not have access
to stock exchange investor redressal forum or arbitration mechanism.
Analyst Certification: Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses,
that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or
her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report.

SEBI DISCLAIMER: “Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any
assurance of returns to investors”.

Disclosures, applying to B&K and the Analyst (together with associates and family members)

Ownership interest in the issuer of the securities mentioned < 1%

Other financial interest in the issuer None
Other material conflict of interest None
Compensation/benefits received from issuer/3rd Parties in past 12 months:
Public offerings managed/co-managed for issuer None
Fees for merchant banking, investment banking or brokerage services (as percentage of issuer’s turnover) < 0.1%
Compensation for other services (as percentage of issuer’s turnover) < 0.1%
Analyst service as officer, director or employee of the issuer None
Involvement in market-making in the issuer’s securities None

7
SECTOR UPDATE
Banks

1. B&K or its Affiliates have not recently been the beneficial owners of 1% or more of the securities mentioned in this report.
2. B&K or its Affiliates have not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. B&K or its Affiliates have not received compensation for investment banking services from the issuer of these securities in the past 12 months and
do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more person of B&K or its affiliates may, from time to time, have a long or short position in any of the securities mentioned herein
and may buy or sell those securities or options thereon either on their own account or on behalf of their clients.
5. B&K or its Affiliates may, to the extent permitted by law, act upon or use the above material or the conclusions stated above or the research or analysis
on which they are based before the material is published to recipients and from time to time provide investment banking, investment management
or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
6. As of the publication of this report, Enclave Capital does not make a market in the subject securities.
Important US Regulatory Disclosures on Subject Companies
Enclave Capital is the distributor of this document in the United States of America. Any US customer wishing to effect transactions in any securities referred
to herein or options thereon should do so only by contacting a representative of Enclave Capital and any transaction effected by a U.S. customer in the
securities described in this report must be effected through Enclave Capital (19 West 44th Street, suite 1700, New York, NY 10036. Tel No: (646) 454 8600).

Batlivala & Karani Securities India Private Limited

Equity Research Division: Unit No. 1101, 1103, 1104, 11th Floor, Hallmark Business Plaza, Sant Dnyaneshwar Marg, Near Guru Nanak Hospital, Bandra East, Mumbai - 400 051, India.
Tel: +91-22-4007 6000, Fax: +91-22-2651 0024 / +91-22-2640 1520.
Compliance officer: Shirish Shah. Tel.: +91 22 4031 7240. E-Mail: [email protected]
For any grievance/dispute: Please contact Batlivala & Karani Securities India Pvt. Ltd.
at the above address or email id - [email protected] and Phone no. +91 22 40317249 /41.
Registered Office: Room No. 3/4, 7 Lyons Range, Kolkata - 700 001. Tel.: +91-33-2243 7902.
SEBI Registration No. for Batlivala & Karani Securities India Pvt. Ltd. (Research Entity) is INH300000211
B&K Research is also available on Bloomberg <BNKI>, Thomson First Call & Investext.