Macquarie:: ICRA Meeting with the CEO – Takeaways regarding banks’ asset quality

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


ICRA
Meeting with the CEO – Takeaways
regarding banks’ asset quality
Event
􀂃 We met with Mr. Naresh Takkar, CEO of ICRA (Rs1,202, Not rated), which is
India’s second-largest credit rating agency, to get a brief update on the asset
quality of banks. We present our takeaways below.

Impact
􀂃 Asset quality likely to improve significantly in FY12: The CEO noted that
there could be a couple of difficult quarters for asset quality, and he expects
FY12 to be a much better year, with credit costs falling significantly for the
banking system. Upgrades have outpaced downgrades, and the health of
corporate India is fine, in his view. Even SME sector exposures appear
comfortable, except for certain export oriented sectors like textiles and leather.
􀂃 Restructured asset slippages have been lower than expected: Mr Takkar
indicated that slippages from restructured assets were expected to be above
30%, according to the firm’s initial estimates. However, banks so far have
reported slippages, on average, of close to 15%, and he doesn’t see
slippages from restructured assets crossing 20%.
􀂃 Too much hype on microfinance exposures: According to Mr Takkar, there
are some initial signs of stress in the AP region, with some likely contagion
effect on other southern regions, but payments so far have been fine. He sees
the magnitude of microfinance exposure at risk for banks as quite small and
thinks there is no need to paint an alarmist view.
􀂃 Long term – there is worry on project finance exposures: The CEO
believes that there is long-term concern about project finance exposures as he
believes that some of these projects have large gearing, that there are
completion risks and that there is a likelihood of time and cost overruns.
􀂃 Comfortable with IDFC’s rating and capital position: ICRA is comfortable
with the exposures that Infrastructure Development Finance Company (IDFC
IN, Rs165, Neutral, TP: Rs200) has. It does not define a specific leverage
number to maintain a particular rating. Its rating is based on its calculation of
economic capital that IDFC needs and that depends on the state of projects.
For example, for a project in a mature state which is getting a regular stream
of cash flows, the economic capital required is much lower, thereby permitting
higher leverage. IDFC also has a 30-year subordinated-debt line from the
government of India which is a comforting factor.
􀂃 Banks unlikely to get further capital relief from loan ratings: ICRA
believes that banks have nearly rated 70% of their loan portfolio (by value),
and most of the large corporates with good ratings have already been rated.
Hence, it thinks there is unlikely to be any significant capital relief from more
corporates getting rated going forward.
Outlook
􀂃 Maintain cautious stance on the sector: Though we think credit charges
are likely to fall next year due to improving asset quality, we believe there
could be near-term disappointment in margins. Additionally, PSU banks also
face the issue of higher opex due to pension liabilities.