Stress test outcome: ICICI/Axis remain top picks ::Prabhudas Lilladher,

Stress test outcome: ICICI/Axis remain top picks
In our sensitivity analysis, we adjust book values for current stress assets recognized
and potential future stress from Infra and other stress sectors mentioned above:
Recognized stressed assets
 NPA coverage of 70% : Axis/ICICI’s NPA coverage is >70% but adjusting for NPA
coverage, PSU bank’s book values is impacted by 5-10% as we adjust book
values for shortfall up to 70%.

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 Restructuring: Adjusted for AI/SEB exposure, slippages from restructured book
is ~15-25% and we have assumed further ~15% slippage from ex-AI/SEB
portfolio, 5% hit on SEB exposure restructured and 10% hit on Air India. Impact
on Axis/ICICI is <2% and for PSU banks is ~5-10% of book, with least impact for
SBI.
Future stress assets
 Stress sectors excl. Infra: 2.5% incremental NPAs for private banks and ~5%
incremental NPAs for PSU banks (difference due to better underwriting) –
exposure to stress sectors between 15-20% for Axis/ICICI and also for PSUs.
 Infra exposure: 7.5% hit on total Infra exposure: Our detailed analysis shows
20% of new power plants to face operating stress, of which, we believe 50%
would not impact Banks/Financials.
Outcome: ICICI/Axis better off
 Book values for PSU banks will be impacted by ~7-25% due to provisioning on
already recognized NPAs or restructured assets, with lowest adjustment for
BOB/SBI and highest for Union bank. High coverage and low restructuring limit
impact from any material provisioning requirement for Axis/ICICI.
 Writing-off future stress book from FY13 equity, the impact is higher for PSU
banks at 15-20% of their net worth v/s 12-15% for ICICI/Axis and very negligible
impact for the retail private banks. Though actual asset quality impact would be
much staggered, the current exercise is to estimate maximum stress and how
valuations look post factoring in the stress.
 Our analysis indicates that, valuations for ICICI/Axis after accounting for such
stringent stress test is at ~15% discount to their trading history. With higher
restructuring and lower provisions, adjustment for PSU banks is ~30-35% of their
book and valuations adjusted for such high level of stress is almost at long-term
average. PSU banks’ do factor in the stress but any hope of sustainable re-rating
for PSUs will be contingent on broad-based recovery; timing of which is
uncertain.