Will 2020 really be the year for the Indian banks? Last year saw banks reporting all the rot in their balance sheets’ due to the broad-based precarious economic situation. The share prices’ however remained unaffected for few of the well-shaped private banks in 2019. 2020 is expected to see disappointing signs of credit growth and asset quality as banks don’t want to lend despite good liquidity, says Macquarie in its recent research report on the Indian banking sector.

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The foreign brokerage firm further explained that the deposit growth is at 10 percent, above than credit growth of 7 percent. A closer look at the flow of resources to the commercial sector clearly reveals that bank credit has been the biggest reason behind a precipitous fall – a 60 percent YoY decline to Rs 4 trillion for H1FY20. Adding to that, banks are telling that utilisation of working capital limits has gone down, which has also affected the credit growth.

The Reserve Bank of India (RBI) recently published its financial stability report predicting a further increase in net performing loans (NPLs). The central bank expects non-performing loans (NPLs) to rise by 60 bps to 9.9 percent in September 2020 from 9.3 percent in September 2019.

The report said the NPL prediction stems through the denominator effect where lower credit growth could have resulted in a higher gross non-performing assets (GNPA) number, suffice to say that if the current poor economic growth continues, the downside risk to earnings estimates coming from lower loan growth and higher than expected credit costs do exist.

In that case, Macquarie said, "Banks today have NPL coverage ratios of 62 percent unadjusted for write-offs, which is healthy. RBI’s FSR report clearly illustrates that recovery rates have gone up under the new bankruptcy law. Hence, we don’t expect more ageing-related provisions. While we believe credit costs will come down, there could be disappointments with respect to the pace at which they will decline."

Stick to the quality names, said the brokerage, pointing at HDFC Bank and ICICI Bank as its top picks. The report added that it won’t buy any PSU banks since private banks continue to outperform and gain market share.