India Banks:(Dis)solving the NPL problem
Per media reports (e.g. Reuters, 14 June 2017; moneycontrol.com, 16 June 2017),the RBI has notified 12 large NPL cases to respective lead bankers with total loansoutstanding of INR2 trn, where resolution has been difficult.
Possible resolutions: 1) We observe that quite a few cases have already undergoneSDR (Strategic Debt Restructuring) where banks own a majority equity stake, puttingthem in a strong position. 2) Accounts with good assets (such as steel and power sectors)could either be given more time to revive, be forced into a management change, or soldto healthy bidders. SBI’s Chairperson, in a recent media interview, pegged the write-offfigure at 50-55%. 3) For companies where physical assets are fewer or non-existent andwhere the debt/equity ratio is substantially higher (eg EPC), the probability of liquidationand higher write-offs is high. 4) We believe success in the resolving of these 12 casesmay provide an impetus for tackling smaller cases later.
Our apprehensions: 1) Lack of precedence in resolving such large cases will be trickyas corporates may try to delay the process using legal options. But over 100 cases havebeen admitted by the NCLT and only a couple of cases have sought legal recourse. Also,given how serious the government and RBI’s intentions are in terms of solving the NPLsituation, we think it’s more likely that the cases will be resolved. 2) However, we expectthat finding a resolution could take longer than the 270 days provided. 3) There isuncertainty on the amount of haircuts for banks. Bankers have already appealed to theRBI to spread out the provisions over multiple quarters.
Impact on banks: While we do not have bank-wise exposure to these 12 accounts citedin media reports, Axis (AXSB IN, INR510.5, Reduce) and ICICI Bank (ICICIBC IN,INR316.5, Buy) have an overall provision cover of 59% and 40% respectively, andtherefore ICICI is at risk of higher provisions compared to Axis. SBI (SBIN IN, INR286.0,Hold) is the lead banker in six of the 12 cases. Per SBI’s 4Q release, the top 50 NPLsform 48% of overall NPLs and SBI has ~50% provision cover, meaning that if the haircutis ~55-60%, incremental provision needs will be relatively lower. Similarly, for BOB (BOBIN, INR167.7, Hold), the top 50 NPLs form 50% of their total NPLs and they have ~55%provision cover and so the impact should be limited. For the rest of the PSU Banks,provision cover is less than 45% and so the impact on them is likely to be relativelyhigher. In continuation of our earlier theme, we prefer private over PSU banks given bettertop-line growth, asset quality and capital position.