Negative news-flow just doesn’t seem to be getting over for the Indian banking and finance sector, which is already reeling under liquidity issues triggered by crisis at IL&FS in 2018, and was followed by issues at YES Bank and the more recent turn of events at Dewan Housing Finance Company (DHFL).
A recent report by global research and brokerage house, UBS, suggests that the next level of risk could appear from leveraged corporates' inter-related companies (their network).
UBS, which expects the NPL cycle to be extended due to the emergence of new stressed accounts, studied 5,600 companies and their links to around 200 large corporates with an aggregate debt of about $250 billion.
The 200 corporates have aggregate debt of around $250 billion, of which only 25 per cent is investment grade. In other words, 75 per cent of this sample is either rated below investment grade (BB or below), with an interest coverage ratio (EBIDTA/Interest) of less than 1.5x, or where no recent credit rating data has been found.
IMAGE: Exposure to NIG network companies by sector; Source: UBS report “Punjab National Bank (PNB) (20.6 per cent of loans) and YES Bank (16.3 per cent) have relatively high exposure to these networks of the banks we cover. Exposure to non-investment grade companies (NIG) in the network at 6.1 per cent of loans is 1.3x the exposure to the main companies (4.8 per cent). The ratio of lending to NIG network companies compared with the main company is relatively high for YES (3.1x) and IndusInd (5.2x), and this does not appear to be fully priced in," Vishal Goyal and Ishank Kumar of UBS said in a co-authored report.
UBS has classified exposure into two broad buckets - investment grade and non-investment grade. The investment grade (IG) bucket, according to them, includes all corporates with external credit ratings of BBB or higher and companies interest coverage ratio (ICR) of over 1.5x, or debt to equity (D/E) of less than 4x, as per the companies' latest financial data.
IMAGE: Exposure to top 10 leveraged companies; Source: UBS report
"YES Bank and IndusInd appear most vulnerable to the new risks than current market expectations. Considering the disruption in NBFCs, we believe ICICI Bank, Axis Bank, State Bank of India (SBI), HDFC Bank and Kotak Mahindra Bank (Kotak) are well placed in the emerging competitive landscape, given their strong presence in most financial products," the report says.
Markets took note of the development with the banking stocks being the worst performers in trade on Thursday. The Nifty PSU Bank index and the Nifty Private Bank index slipped over 3 per cent and 1.25 per cent in intra-day trade.
Among individual stocks, Punjab National Bank (PNB), J&K Bank, Canara Bank, Indian Bank and Union Bank of India were among the key PSB losers that slipped 4 per cent to 6.2 per cent during the day. YES Bank, IndusInd Bank were the biggest losers in the private banking space, falling 8 per cent and 12 per cent in intra-day deals.
In this backdrop, private sector banks, UBS analysts say, could outgrow industry peers. It believes the risk-reward is favourable for Axis Bank and ICICI Bank among the corporate lenders. Their least preferred stocks are YES Bank, IndusInd Bank (sell rating) and PNB.
“NBFC funding troubles could allow for better pricing / higher loan growth for banks in the near-term. State-owned (SOE) banks are trading below or in line with their five-and 10-year average forward price/book value (P/BV), while most private banks are trading above their five-/10-year average P/BV. We believe the market is not pricing in the structural opportunity available to ICICI Bank, Axis Bank and SBI due to near-term issues. NPL risk for YES Bank and IndusInd does not seem to be fully priced in,” the UBS report says.