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India banks
Meeting with ICRA head: Asset quality
– pain lies ahead
Event
ƒ The best part of the asset quality cycle nearly over: We met Mr. Naresh
Takkar, the head of India’s second-largest credit agency, ICRA, and Ms. Vibha
Batra, head of ICRA’s financial sector ratings, to get an update on the credit
quality situation. The key message was that the best part of the asset quality
cycle is nearly over and that there could be a pickup in credit costs from FY13
onward.
Impact
ƒ FY12 could look better: ICRA believes that FY12 could look better than FY11
in terms of slippages and overall credit costs, as the FY11 base was high due
to one-offs like agri-debt waivers, moving to system-based recognition of NPLs
and large slippages from restructured assets, which seem unlikely to recur.
Despite this, ICRA says the underlying trends are negative, as reflected by the
pickup in downgrades of India Inc in 2H FY11 (see Figure 1). Hence, in FY13,
slippages and credit costs are expected to increase.
ƒ Worries remain in infrastructure sector – mainly power and roads: ICRA
believes that the weak health of SEBs is a cause of concern in the power sector
and that NPLs could inch up from FY13 onward. However, it is more worried
about banks’ exposure to SEBs than PFC/REC as the former has largely
produced cash losses for SEBs (ie, working capital), while the latter has mainly
been providing funding for creating capital assets. Road projects are another
cause of concern as ICRA believes that companies have bid aggressively for
road projects and are operating on thin margins. These projects are also highly
leveraged; hence sensitivity to rising rates is very high.
ƒ Commercial real estate (CRE) portfolio exposure of banks – not a big
concern: The overall exposure of banks to the commercial real estate sector
(developers, builders) is only around 3%. Moreover, banks cannot finance
against the purchase of land, according to RBI regulations. Nearly 40% of CRE
portfolios are lease rentals/rental discounting, which are a less risky portfolio.
ƒ Retail asset quality holding up very well, CVs could be under stress: So
far, the performance of the securitised pools that ICRA has rated has been fine
across all major retail asset classes like mortgages, cars and CVs. However,
as a result of fuel price hikes coupled with high inflation and a slowing
economy, CVs are expected to be under stress. ICRA is not worried about the
asset quality of the mortgage and car loan segments, despite rising interest
rates.
ƒ Profitability of NBFCs to come under pressure: ICRA did admit that
securitisation volumes are down and are expected to be weak this year after
the revised PSL guidelines. Profitability may be affected this year by slowing
growth, declining margins and incrementally deteriorating asset quality. For
MFIs, the issue has been more centric to states like AP, West Bengal and TN,
and the situation in other states is fine and collections are normal.
Outlook
ƒ We prefer private banks like ICICI Bank and HDFC Bank and would avoid PSU
banks in the near term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India banks
Meeting with ICRA head: Asset quality
– pain lies ahead
Event
ƒ The best part of the asset quality cycle nearly over: We met Mr. Naresh
Takkar, the head of India’s second-largest credit agency, ICRA, and Ms. Vibha
Batra, head of ICRA’s financial sector ratings, to get an update on the credit
quality situation. The key message was that the best part of the asset quality
cycle is nearly over and that there could be a pickup in credit costs from FY13
onward.
Impact
ƒ FY12 could look better: ICRA believes that FY12 could look better than FY11
in terms of slippages and overall credit costs, as the FY11 base was high due
to one-offs like agri-debt waivers, moving to system-based recognition of NPLs
and large slippages from restructured assets, which seem unlikely to recur.
Despite this, ICRA says the underlying trends are negative, as reflected by the
pickup in downgrades of India Inc in 2H FY11 (see Figure 1). Hence, in FY13,
slippages and credit costs are expected to increase.
ƒ Worries remain in infrastructure sector – mainly power and roads: ICRA
believes that the weak health of SEBs is a cause of concern in the power sector
and that NPLs could inch up from FY13 onward. However, it is more worried
about banks’ exposure to SEBs than PFC/REC as the former has largely
produced cash losses for SEBs (ie, working capital), while the latter has mainly
been providing funding for creating capital assets. Road projects are another
cause of concern as ICRA believes that companies have bid aggressively for
road projects and are operating on thin margins. These projects are also highly
leveraged; hence sensitivity to rising rates is very high.
ƒ Commercial real estate (CRE) portfolio exposure of banks – not a big
concern: The overall exposure of banks to the commercial real estate sector
(developers, builders) is only around 3%. Moreover, banks cannot finance
against the purchase of land, according to RBI regulations. Nearly 40% of CRE
portfolios are lease rentals/rental discounting, which are a less risky portfolio.
ƒ Retail asset quality holding up very well, CVs could be under stress: So
far, the performance of the securitised pools that ICRA has rated has been fine
across all major retail asset classes like mortgages, cars and CVs. However,
as a result of fuel price hikes coupled with high inflation and a slowing
economy, CVs are expected to be under stress. ICRA is not worried about the
asset quality of the mortgage and car loan segments, despite rising interest
rates.
ƒ Profitability of NBFCs to come under pressure: ICRA did admit that
securitisation volumes are down and are expected to be weak this year after
the revised PSL guidelines. Profitability may be affected this year by slowing
growth, declining margins and incrementally deteriorating asset quality. For
MFIs, the issue has been more centric to states like AP, West Bengal and TN,
and the situation in other states is fine and collections are normal.
Outlook
ƒ We prefer private banks like ICICI Bank and HDFC Bank and would avoid PSU
banks in the near term.
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