Banks' finances to improve by this year-end

Asset sales, turnaround of stressed companies to boost banks' balance sheets

Impressive turnarounds and asset sales by stressed companies are giving confidence to Indian banks as their financial performance will improve in a couple of quarters.

Since January this year, stressed Indian companies sold assets worth Rs 1,50,000 crore to both foreign and local players (see chart). These companies would be able to repay a significant part of their debt and reduce the stress on the banking system.

According to analysts, Essar's repayment itself would account for 10 per cent of the systemic non-performing loans (NPL). In June 2016, the gross NPLs of 40 listed banks stood at Rs 6,32,804 crore.

In the process, banks would be able to cut their own non-performing assets (NPAs) by a significant amount as new owners with better credit ratings take over these companies, bankers said. State Bank of India and ICICI Bank would be the big beneficiaries as they had the largest exposure to stressed corporates.

Global financial powerhouse, Morgan Stanley estimates that Essar Rosneft deal alone could reduce ICICI Bank's below-investment-grade exposure to stressed sectors as of June 2016 by 15 per cent. Besides, sale of assets worth Rs 18,320 crore by another troubled group, Jaiprakash Associates to UltraTech Cement and Orient Cement and Anil Ambani's Reliance Group asset sales of Rs 26,600 crore would also help banks reduce their exposure by the end of the year.

"Asset sales by corporates are helping banks to reduce their mountain of bad debt. Banks are also supporting these transactions by taking a haircut. Ultimately banks are the gainers as evident from the stock market reaction," said a banker asking not to be quoted. The S&P BSE Bankex gained 2.4 per cent on Tuesday.

Ashwani Bhatia, president and chief operating officer at SBI Capital Markets, said, "The system is definitely in resolution phase and the pace will pick up in the coming months. Decision making by lenders within consortium also needed to be quickened." However, the benefits of resolution would flow in gradually as addressing issues like shareholding, taxation and court approvals take time, he said.

On Monday, State Bank of India Chairman Arundhati Bhattacharya had cited examples of Haldia Petrochemicals, Suzlon and Jindal Stainless which were doing much better after resolution on the debt front or sale of assets. SBI, she said, was working with 10-15 more such stressed accounts and the bank was targeting 2017-end to find solutions for them.

Take, for example, Haldia Petrochemicals. After halting production last year on account of shortage of funds, it was able to turn around operations, thanks to improvement in both market conditions and availability of capital from banks. The promoter, Chatterjee Group, and SBI infused Rs 450 crore into the company to help it resume production. Gradually, the borrowing increased to Rs 900 crore as other banks, including the Punjab National Bank, ICICI Bank and IDBI, also chipped in. "This resulted in the company's circulating capital. At the same time, the market also started reviving and so did we," a Haldia official said.

On the other hand, after Suzlon Energy sold its German unit, Senvion, for $1.16 billion in January 2015, it managed to reduce its net loss from Rs 6,538 crore reported in December 2014 quarter to Rs 260 crore as of June 2016 quarter. Its interest cost reduced from Rs 555 crore in March 2015 to Rs 304 crore in June 2016, giving it a significant relief in finance costs.

For the June quarter, Jindal Stainless announced that its earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 100 per cent to Rs 280 crore. This was mainly due to its asset sale plan that reduced its debt burden of both term loan and working capital facilities.

All these success stories would help banks to support similar deals of other large corporates that are stuck due to a global commodity meltdown and changes in regulatory regime.