Banking stocks gained ground on Thursday on reports that the Reserve Bank of India (RBI) has trimmed the list of companies whose loans have to be provided for against default risk in the March quarter. Jaiprakash Associates and Coastal Energen are among the 20 firms whose names have been dropped out of the 150 corporates that the RBI had listed in December.
Given the development, Nifty Bank index gained over 2% in intra-day deals. Nifty PSU Bank index, on the other hand, zoomed over 4% with Punjab National Bank (PNB), Bank of Baroda (BoB), Canara Bank, Oriental Bank, Union Bank and State Bank of India (SBI) gaining 4% - 6.5%.
Analysts believe the move could ease the pressure on banks that had spread the impact of the RBI’s asset quality review (AQR) over two quarters and recognised only 50-70% of the NPAs in Q3.
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“RBI’s move is positive if the list is being pruned because of deleveraging or an assurance of debt reduction via a clear roadmap by these companies. However, if the decision was taken on the back of improving metal prices or the recovering health of metal companies on account of the minimum import price imposed recently by the government, then it merely pushes the problem to a later stage,” points out Parag Jariwala, vice president for institutional research for Banking and Financial Services at Religare Capital Markets in a co-authored report with Vikesh Mehta.
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“This move is positive for the sector and will benefit banks that have an exposure to JP Associates, Essar Group, GMR and GVK. In our view, corporate lenders like ICICI Bank and SBI that have the highest exposure to these companies will benefit the most,” they add.
Is the worst over?
While the recent move brought cheer to the banking stocks on Thursday, analysts still remain cautious on the banking stocks given the NPL overhang.
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UBS, for instance, believes that Indian banks are still in the middle of the NPL (non-performing loans) cycle. As per UBS’ estimates, pool of stressed loans could be more than 2x of GNPL (gross NPL) reported by banks till December 2015.
UBS’ analysis of 12,047 companies with total borrowings of more than $700 billion (constituting more than 50% of system loans and bonds) indicates that exposure to financially weaker companies could be 15-16% of system loans and bonds (versus estimated GNPLs of 7% by March 2016).
“In last 3 years a lot of discussion around size of problem loans/sectors has happened, however NPL recognition and provisions thereof are lagging significantly. While the total pool of stressed loans may not increase from here, NPL provisions may catch up to the latent stress in the system. We expect provisions to go up significantly in FY17,” said Gautam Chhaochharia, Head of India Research at UBS in a recent note.
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“We believe that NPL risk still remains the key near-term stock catalyst and therefore corporate lenders may continue to face headwinds in coming quarters. We expect retail segment to grow at healthy pace and banks with dominant presence in retail segment and relatively lower exposure to stressed loans would continue to outperform peers,” he adds.
Analysts at Morgan Stanley also share a similar view. While they agree that F16 level of bad loan formation was high, causing many banks to become loss-making; they estimate the banks under their coverage to report 4.5% of loans as new NPLs (~Rs 2 trillion) going ahead.
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“F16 was tough, yet we don’t expect F17 to be close to a normalized year. We expect F17 NPL formation to stay elevated at ~3% of loans as economy remains weak implying corporate profitability will stay weak. Also, RBI has said that it wants bank balance sheets to be cleaned up by F17. This would likely imply further regulatory pressure on banks to recognise is likely in F17,” Anil Agarwal, Sumeet Kariwala and Subramanian Iyer of Morgan Stanley said in an April 18 report on the sector.
“Among corporate lenders, we prefer Axis Bank and YES Bank. Downgrade ICICI Bank and Bank of Baroda to equal-weight," they add.