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India Banks
Call with ICRA Head on asset quality
Event
�� Best in asset quality cycle over: We hosted a conference call for investors
with Mr. Naresh Takkar, the head of India’s second largest credit agency
ICRA, Mr. Anjan Ghosh – Head of corporate ratings, Ms. Vibha Batra – Cohead
financial sector ratings to get an update on the credit quality situation.
The key message was that the best in asset quality cycle is over and NPLs
are likely to increase – sectors such as power, agriculture and textile are
particularly vulnerable. The number of downgrades taking place is currently
twice that of upgrades.
Impact
�� Overall NPLs to increase and more restructuring to come: Gross NPLs
are expected to increase to 2.7% for FY12 from 2.3% in FY11. However,
incremental credit provisioning could reduce to 0.35-0.45% in FY12 as against
0.60% in FY11. Many banks had to provide more last year to reach a 70%
NPL coverage ratio, and moreover, banks now need to maintain an NPL
coverage ratio of 70% based on a Sep-2010 gross NPL base. Hence credit
charges are likely to be low in FY12 compared to FY11. Over the medium
term, an additional 3.5-4% of advances may need restructuring according to
ICRA; this may increase the banks’ net NPL plus losses from restructured
advances in relation to net worth to 18% from around 12% as of FY11.
�� Worries over power sector, restructuring likely: Bank credit to the power
sector as a % of the banks’ total net worth has increased from 33% in FY06 to
56% in FY11. ICRA estimates that 30-40% of the banks’ total exposure to the
power sector exposures is funding the cash losses of the State
Discoms/utilities where the chances of restructuring are fairly high. Power
projects based on competitive bidding and/or imported coal are at risks.
�� Not very worried about road projects: ICRA’s experience suggests that
cost overruns in road projects have remained low in the range of 5-10%, given
fixed price EPC contracts. Actual traffic in the initial years is lower than
projections by 15-25%, however subsequent growth is high, which partially
compensates for the initial shortfall. The initial project IRR of 16-18% could
decline to 10-12% because of delays and lower traffic but debt servicing is not
a major issue over the longer term.
�� Other potential vulnerable sectors – agriculture and textiles: The poor
credit culture emanating post the debt waiver is a cause for concern for the
agriculture sector and NPLs may remain high. Concerns on textiles have
again emerged due to the global slowdown. There are concerns over near
term profits due to the sharp correction in cotton and yarn prices, which may
impact those players saddled with inventory.
�� Retail NPLs no major concern: Retail asset quality is broadly fine and loss
rates are unlikely to be more than 2% in CVs, 1.2% in CEs and around 1% in
cars, in line with historical averages. ICRA is also not worried about teaser
rate home loans as they believe banks have largely done credit appraisals
based on higher floating rates and salaries have increased in the past 2 yrs.
Outlook
�� We maintain our cautious stance on the sector in the near term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Banks
Call with ICRA Head on asset quality
Event
�� Best in asset quality cycle over: We hosted a conference call for investors
with Mr. Naresh Takkar, the head of India’s second largest credit agency
ICRA, Mr. Anjan Ghosh – Head of corporate ratings, Ms. Vibha Batra – Cohead
financial sector ratings to get an update on the credit quality situation.
The key message was that the best in asset quality cycle is over and NPLs
are likely to increase – sectors such as power, agriculture and textile are
particularly vulnerable. The number of downgrades taking place is currently
twice that of upgrades.
Impact
�� Overall NPLs to increase and more restructuring to come: Gross NPLs
are expected to increase to 2.7% for FY12 from 2.3% in FY11. However,
incremental credit provisioning could reduce to 0.35-0.45% in FY12 as against
0.60% in FY11. Many banks had to provide more last year to reach a 70%
NPL coverage ratio, and moreover, banks now need to maintain an NPL
coverage ratio of 70% based on a Sep-2010 gross NPL base. Hence credit
charges are likely to be low in FY12 compared to FY11. Over the medium
term, an additional 3.5-4% of advances may need restructuring according to
ICRA; this may increase the banks’ net NPL plus losses from restructured
advances in relation to net worth to 18% from around 12% as of FY11.
�� Worries over power sector, restructuring likely: Bank credit to the power
sector as a % of the banks’ total net worth has increased from 33% in FY06 to
56% in FY11. ICRA estimates that 30-40% of the banks’ total exposure to the
power sector exposures is funding the cash losses of the State
Discoms/utilities where the chances of restructuring are fairly high. Power
projects based on competitive bidding and/or imported coal are at risks.
�� Not very worried about road projects: ICRA’s experience suggests that
cost overruns in road projects have remained low in the range of 5-10%, given
fixed price EPC contracts. Actual traffic in the initial years is lower than
projections by 15-25%, however subsequent growth is high, which partially
compensates for the initial shortfall. The initial project IRR of 16-18% could
decline to 10-12% because of delays and lower traffic but debt servicing is not
a major issue over the longer term.
�� Other potential vulnerable sectors – agriculture and textiles: The poor
credit culture emanating post the debt waiver is a cause for concern for the
agriculture sector and NPLs may remain high. Concerns on textiles have
again emerged due to the global slowdown. There are concerns over near
term profits due to the sharp correction in cotton and yarn prices, which may
impact those players saddled with inventory.
�� Retail NPLs no major concern: Retail asset quality is broadly fine and loss
rates are unlikely to be more than 2% in CVs, 1.2% in CEs and around 1% in
cars, in line with historical averages. ICRA is also not worried about teaser
rate home loans as they believe banks have largely done credit appraisals
based on higher floating rates and salaries have increased in the past 2 yrs.
Outlook
�� We maintain our cautious stance on the sector in the near term.
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