Investors should go beyond banks' headline numbers, dig deeper after recast

While corporate loans shall be restructured, retail and SME loans are at lenders' discretion

For the first time in over a decade, analysts brushed aside the headline numbers posted by banks for the June quarter. Instead, they pushed investors to look for finer details, such as cheque bounce rates, loan book covered by the moratorium, and the cross-section of customers opting for the benefit. As regulations for restructuring come out and banks having limited time until December 31, 2020, to implement the same, the growing consensus is that September quarter results, too, may not hold much relevance.

Suresh Ganapathy of Macquarie Capital strongly feels that loan restructuring will only increase the opacity of financials and balance sheets of banks may not reflect the true nature of their books in the near term.

Krishnan A S V of SBICap Securities urges investors to ask banks for details that are otherwise not be public information. “Our learnings from the two previous large-scale restructuring exercises suggest that investors are better-off ignoring the headline restructured portfolio and focusing instead on greater disclosures to assess the true sense of the borrowers’ ability to repay. Investors should encourage banks to disclose parameters, such as nature of lending, nature of the collateral, and the depth of banking relationship,” he emphasises.

There’s a strong reason for both analysts harping on a possible opacity in financials of banks: Loans worth Rs 4-5 trillion (corporate, SME and retail loans included), which are affected following the Covid-19-triggered disruption, are likely to be restructured. Of the lot, unknown territories are retail (home loans, auto loans, and personal loans) and SME (small and medium enterprise) loans. 

 

 

While there are coded norms and elaborate financial ratio tests to pass for restructuring of corporate loans, the applicability for restructuring retail loans is at the discretion of banks. In other words, restructuring corporate loans may be a more collective, uniform and disciplined exercise, whereas retail and SME loans may be prone to subjectivity.

Sample a case where a borrower may have taken two loans — an auto loan and a home loan — from two different banks. While the bank that has lent the home loan may restructure the exposure, but the other, which has extended the auto loan, may deny a similar benefit. Thus, the borrower whose earning capacity is stretched would be a standard account for one bank and a restructured account for the other.

Take another case where a borrower has availed two loans from a bank. One bank may restructure both loans, while another, based on some internal cash flow projections of the customer, may extend the benefit only to one loan — possibly that with higher outstanding.

“Even with moratorium, such practices were followed; with restructuring, they may increase,” says an analyst with a foreign brokerage. These practices are worth highlighting because while banks may reveal fewer restructured loans, the borrower’s overall loan repayment ability is under pressure and that may never be revealed to their stakeholders, including equity investors. A note by SBICap Securities indicates that 50 per cent of Rs 9.8 trillion of SME loans and 15 per cent of Rs 28.2 trillion retail loans were under moratorium and 30-50 per cent of these loans are likely to be restructured. 

At 10 per cent provisioning, Rs 36,000-crore provisioning cost is waiting to hit banks by December 31, 2020, or over half the capital raised by private banks, so far. With various restructuring tools available until FY23, true balance sheet position of banks may not be known for a while. Not surprisingly then, investors have been cautious with banking stocks. The Nifty Bank index has lagged the Nifty50 index since March lows, as well as in the recent past. On Tuesday, while the Nifty50 was down 0.33 per cent, the Nifty Bank was down 0.87 per cent. The RBI had announced the restructuring norms on Monday evening.

Analysts at BofA Securities say as banks restructure loans under the Covid shock, it will add to uncertainty in the short run. For investors, this means staying cautious on the sector, even if banks put out stunning quarterly results.