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We hosted a conference call with Mr. Vineet Gupta of Moody’s, author of “Banking
System Outlook: India” whereby the rating agency has changed the outlook of Indian
banking system from stable to negative, citing expected deterioration in asset quality
(hence profitability) and capitalization over the next 12-18 months. Below is the key
stance of Moody’s as well as its raison d'être for the downgrade as discussed in the call:
Asset quality: Highly adverse scenario can witness GNPAs of 12%
• Demanding operating environment coupled with growing interest burden leads to
stress on corporate portfolio, especially among SMEs. Power, airlines and textile
are seen as potential culprits.
• Increase in mortgage rates by 350bps over the past 12 months has led to home
loan tenures rising to 35-37 years, way more than the working/actual life of the
borrower.
• Concentration risk can lead to big jumps in GNPA. He cited the example of an
Indian telecom tower company which is currently restructuring its debt of USD5bn
with Indian banks.
• Despite focused endeavors to accelerate recovery efforts over the last 10-15 years,
little has been achieved as recoveries still lag behind fresh NPA formation.
SARFAESI Act has been of help, however, lot more needs to be done at the
individual branch level by banks.
• Slowing pace of growth over FY12-13 will also lead to headline NPL ratios
appearing elevated.
• Restructuring of debt of the loss ridden state discoms is seen more as a
postponement of the problem as their underlying activity is not productive enough
to fulfill obligations.
Profitability: PPP/gross loans drop to 1.8% from 3.6% in FY11
The adverse scenario - with GNPA of 12% with LGD of 60% - will translate into an
expected loss of 7.2% of gross loans. Assuming a utilization of 1.3% of accumulated
loan-loss provisions and Tier 1 absorbing another 4%, ensuing losses can see PPP/gross
loans dropping to 1.8%.
Tier 1: Unfavorable landscape to see Tier 1 at sub‐6% level
As mentioned above, in the event of GNPA at 12% and LGD at 60%, Tier 1 will possibly
absorb 4% of the total 7.2% of likely losses (as a % of gross loans), taking Tier 1 to 5.6%
from 9.5% in March 2011. Another area of significant concern for PSU banks is the
uncertainty on timing, quantum and the form of support that can be expected from
Government of India. Delay in capital infusion in SBI (Tier 1 at 7.47% as on September
2011) is a case in point. Loan growth of 16%-18% with a declining profitability does not
make internal accruals a highly steadfast source either.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted a conference call with Mr. Vineet Gupta of Moody’s, author of “Banking
System Outlook: India” whereby the rating agency has changed the outlook of Indian
banking system from stable to negative, citing expected deterioration in asset quality
(hence profitability) and capitalization over the next 12-18 months. Below is the key
stance of Moody’s as well as its raison d'être for the downgrade as discussed in the call:
Asset quality: Highly adverse scenario can witness GNPAs of 12%
• Demanding operating environment coupled with growing interest burden leads to
stress on corporate portfolio, especially among SMEs. Power, airlines and textile
are seen as potential culprits.
• Increase in mortgage rates by 350bps over the past 12 months has led to home
loan tenures rising to 35-37 years, way more than the working/actual life of the
borrower.
• Concentration risk can lead to big jumps in GNPA. He cited the example of an
Indian telecom tower company which is currently restructuring its debt of USD5bn
with Indian banks.
• Despite focused endeavors to accelerate recovery efforts over the last 10-15 years,
little has been achieved as recoveries still lag behind fresh NPA formation.
SARFAESI Act has been of help, however, lot more needs to be done at the
individual branch level by banks.
• Slowing pace of growth over FY12-13 will also lead to headline NPL ratios
appearing elevated.
• Restructuring of debt of the loss ridden state discoms is seen more as a
postponement of the problem as their underlying activity is not productive enough
to fulfill obligations.
Profitability: PPP/gross loans drop to 1.8% from 3.6% in FY11
The adverse scenario - with GNPA of 12% with LGD of 60% - will translate into an
expected loss of 7.2% of gross loans. Assuming a utilization of 1.3% of accumulated
loan-loss provisions and Tier 1 absorbing another 4%, ensuing losses can see PPP/gross
loans dropping to 1.8%.
Tier 1: Unfavorable landscape to see Tier 1 at sub‐6% level
As mentioned above, in the event of GNPA at 12% and LGD at 60%, Tier 1 will possibly
absorb 4% of the total 7.2% of likely losses (as a % of gross loans), taking Tier 1 to 5.6%
from 9.5% in March 2011. Another area of significant concern for PSU banks is the
uncertainty on timing, quantum and the form of support that can be expected from
Government of India. Delay in capital infusion in SBI (Tier 1 at 7.47% as on September
2011) is a case in point. Loan growth of 16%-18% with a declining profitability does not
make internal accruals a highly steadfast source either.
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