 "Gains for state-run banks")
The government’s plans to turn around state electricity boards (SEBs) under the Ujwal DISCOM Assurance Yojna (UDAY) scheme has received a thumbs-up from analysts, who believe this will help improve their operations and profitability on a sustainable basis and boost the prospects of independent power producers (IPPs).
The impact on banks and non-banking financial companies (NBFC), though, will differ. Reforms will impact these companies in multiple ways. First, reduced borrowings and repayment of loans from SEBs could shrink their loan books in the interim. Second, banks might reverse standard provisions (five per cent of loans) made on restructured SEB loans, improving profitability.
Third, conversion of SEB loans into state-owned loans will compress the yields on these loans from 12-15 per cent prevailing to 8-9 per cent and, hence, lead to net interest margin (NIM) pressure, estimate analysts. This could also impact the return ratios of banks and NBFCs. For banks, though, this impact will be partly mitigated by provision reversals.
Analysts estimate provision reversals could lead to an increase of 0.2-3.5 percentage points in the gross non-performing assets provision coverage ratio across public sector banks (PSBs), beside improving their balance sheets. Since state government bonds are safer, banks will also be required to provide less risk weight to such loans. So, the impact on their NIMs might be moderate.
Analysts at Edelweiss Securities estimate that banks’ return on equity ratios could be hit by 80-100 bps over the next few years. For infra financiers such as Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), the return on equity impact will be relatively higher at 3-5 percentage points as working capital loans to discoms get re-priced downwards.
Most analysts agree that PFC and REC will see more hit after the implementation of this scheme. These companies’ NIMs will witness multiple pressure points such as lower yield on these loans and lower loan growth to this segment, in the wake of intensified competition from banks. Consequently, their earnings are estimated to fall 15-20 per cent over the next couple of years, say analysts at Kotak Institutional Equities. They estimate REC has 32 per cent exposure to distribution companies while that of PFC stands at 22 per cent.
However, as the initial adjustments take place, the power financiers could again see loan demand pick up. Banks will also be cagey to take higher exposure given the sectoral limits as well as the bad experience of the past many years.
Analysts have mixed investment views on these companies. CLSA, for instance, is more positive due to inexpensive valuations of one time FY17 estimated book value. On the other hand, Ambit Capital has a very cautious view. “Yields of eight-nine per cent from state government bonds hardly cover PFC and REC’s funding costs of 8.5-9 per cent and puts a big question mark on their intermediation role in funding SEBs and, hence, on their business model,” they say. Not surprisingly, both these stocks nose-dived 8-11 per cent in Friday’s trade vis-à-vis a flattish Sensex.
Private banks stand to be indirect beneficiaries of this scheme. Banks such as ICICI Bank, Axis Bank and IDFC, which have a relatively higher exposure to the power sector, could benefit from higher credit demand from IPPs. Some analysts are turning more positive on select PSBs on account of reforms such as Indradhanush and UDAY.
The impact on banks and non-banking financial companies (NBFC), though, will differ. Reforms will impact these companies in multiple ways. First, reduced borrowings and repayment of loans from SEBs could shrink their loan books in the interim. Second, banks might reverse standard provisions (five per cent of loans) made on restructured SEB loans, improving profitability.
Third, conversion of SEB loans into state-owned loans will compress the yields on these loans from 12-15 per cent prevailing to 8-9 per cent and, hence, lead to net interest margin (NIM) pressure, estimate analysts. This could also impact the return ratios of banks and NBFCs. For banks, though, this impact will be partly mitigated by provision reversals.
Analysts estimate provision reversals could lead to an increase of 0.2-3.5 percentage points in the gross non-performing assets provision coverage ratio across public sector banks (PSBs), beside improving their balance sheets. Since state government bonds are safer, banks will also be required to provide less risk weight to such loans. So, the impact on their NIMs might be moderate.
Analysts at Edelweiss Securities estimate that banks’ return on equity ratios could be hit by 80-100 bps over the next few years. For infra financiers such as Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), the return on equity impact will be relatively higher at 3-5 percentage points as working capital loans to discoms get re-priced downwards.
Most analysts agree that PFC and REC will see more hit after the implementation of this scheme. These companies’ NIMs will witness multiple pressure points such as lower yield on these loans and lower loan growth to this segment, in the wake of intensified competition from banks. Consequently, their earnings are estimated to fall 15-20 per cent over the next couple of years, say analysts at Kotak Institutional Equities. They estimate REC has 32 per cent exposure to distribution companies while that of PFC stands at 22 per cent.
However, as the initial adjustments take place, the power financiers could again see loan demand pick up. Banks will also be cagey to take higher exposure given the sectoral limits as well as the bad experience of the past many years.
Analysts have mixed investment views on these companies. CLSA, for instance, is more positive due to inexpensive valuations of one time FY17 estimated book value. On the other hand, Ambit Capital has a very cautious view. “Yields of eight-nine per cent from state government bonds hardly cover PFC and REC’s funding costs of 8.5-9 per cent and puts a big question mark on their intermediation role in funding SEBs and, hence, on their business model,” they say. Not surprisingly, both these stocks nose-dived 8-11 per cent in Friday’s trade vis-à-vis a flattish Sensex.
Private banks stand to be indirect beneficiaries of this scheme. Banks such as ICICI Bank, Axis Bank and IDFC, which have a relatively higher exposure to the power sector, could benefit from higher credit demand from IPPs. Some analysts are turning more positive on select PSBs on account of reforms such as Indradhanush and UDAY.