Housing Scam: CBI investigation on developer loans- no systemic risk:: Edelweiss

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The Economic Offence Wing has registered cases against the officials of following companies: LIC Housing Finance (LICHF), Bank of India (BoI), Central Bank of India (CBOI), Punjab National Bank (PNB), Life Insurance Corporation of India (LIC), and Money Matters. The CBI has arrested CEO of LIC Housing Finance, General Manager of BoI, Director of CBOI, Chief General Manager of PNB and Investment Secretary of LIC. The officials have been arrested on corruption charges of accepting bribes from private financiers to route loans to corporates. An LIC official (Investment Secretary) has been arrested on charges of revealing confidential information.

n  Our views

·         The charges of corruption on officials of PSU banks/institutions are currently confined to the exposed companies and financiers. Moreover, the quantum involved is minuscule and the act may not necessarily pose any systemic risk to asset quality. As per news reports, the corruption charges in case of LICHF pertain to INR 1.88 bn of loans (0.4% of its loan book) provided to DB Realty, syndicated via Money Matters (a private financier). As far as the banks involved are concerned, given the involvement of only the GM/CGM level executives (who have limited sanctioning power), total exposure will be small as a proportion of the overall loan book.

n  Outlook

·         We believe these investigations will have negative implications on the companies involved and will remain an overhang, both from financial impact as well as sentiment perspective.

·         In case of LICHF, it jeopardizes the growth prospects on one hand and raises the issue of management change on the other (as this was the only company where the CEO was charged).

·         We believe with this stringent action by CBI against PSU officials, the loan origination, approval and credit appraisal process in the banking system will be further strengthened.

·         On November 24, the Bankex fell 2.9% on the news of CBI investigation, though it does not pose any systemic risk to the financial services sector in particular. Bankex has corrected 11% from its peak in the last fortnight (underperforming Sensex by 4% pts), amidst concerns of inflation, banks exposures to micro-finance companies and telecom 2G auction scam. We believe some of the banks have once again corrected to reasonable valuations and fall in the Banking index of 2.9% (in general) and some of the stocks like Canara Bank (-7.5%), BoB (-3.7%), Union Bank (-3.7%), State Bank of India (-3.5%), in particular who are in no way related to the CBI action, was unwarranted and the Street has over-reacted due to uncertainty of charges, and companies and quantum involved.