Macquarie Research: India Banks Takeaways

India Banks
Takeaways from meeting with head of
financial sector ratings of CRISIL
Event
 We met with Mr. Suman Chowdhury, who is the head of financial sector
ratings at CRISIL (CRISIL IN, Rs6,133, Not rated) – India’s largest credit
rating company.
Impact
 Near-term pressures on asset quality do exist: CRISIL expects Gross
NPLs in the system to go up to 3.1% in FY11 from 2.4% in FY10. In absolute
terms, Gross NPLs are expected to go up by 60% YoY, to Rs1.35tr in FY11E
and to Rs1.60tr by FY12E. The slippages could be mainly from sectors like
textiles, chemicals, leathers, steel intermediaries and commercial real estate.
 The SME segment is likely to be the largest contributor of NPLs in the
system: CRISIL expects SME exposures to be roughly 20–25% of the overall
loan portfolio of banks and expects NPLs in this sector to go up to 5.5% in
FY2011 from 3.3% in FY2010. South-based textile SMEs, small sponge iron
units and leather and chemicals are some of the sectors where stresses still
persist.
 Longer term – there indeed are some concerns: CRISIL is indeed worried
about the increasing exposure to infrastructure assets, in which it believes
there are completion risks and the likelihood of time and cost overruns.
However regulatory forbearance might result in NPLs coming with a
significant lag (two to three years). Teaser home loan rates are also another
area of concern, as a sharp rise in interest rates could impact mortgage
delinquencies. CRISIL feels that PSU banks are at risk as far as their retail
NPLs are concerned, considering the kind of aggression they have shown in
retail lending, and expects delinquencies to come from the retail portfolio of
PSU banks.
 Restructuring has actually helped banks: CRISIL acknowledges that
restructuring has actually helped banks and the absence of restructuring
could have increased FY11 Gross NPLs to 5%. CRISIL expects slippages
from the restructured assets portfolio to be around 15–20%. The worry is
mainly on account of companies’ inability to honour their principal
commitments, which were under moratorium for six to 18 months and are
likely to come up for repayments in the near term.
 Strong capitalization continues to provide healthy cushion: CRISIL
believes that the ratio of net worth to net NPLs is likely to decrease to 9x by
FY12 from 11x in FY2010. Basel III norms are unlikely to have any significant
impact on the sector.
 Corporate credit quality is improving: Since Jan’10, the ratio of upgrades
to downgrades (defined as modified credit ratio) has been greater than 1.
From Oct’08 until Dec’09, this ratio was far below 1 and was even close to
zero. Sound macroeconomic fundamentals have resulted in improved outlook
for credit quality of corporates over the longer term.
Outlook
 We maintain our cautious stance on the sector and recommend investors to
exit financials after the recent sharp outperformance.