IDFC First, IndusInd Bank: AGR verdict will not dent earnings, say experts

The verdict soured sentiment at banking counters which were factoring-in at least 15 years timeline for the payment of AGR dues

The Supreme Court on Tuesday allowed Vodafone Idea and Bharti Airtel 10 years time to pay their outstanding adjusted gross revenue (AGR) dues, starting April 2021. The apex court asked telcos to pay 10 per cent of their dues as "upfront payment" by March 31, 2021. Remaining instalments will need to be paid on February 7 every year.

The verdict temporarily soured sentiment at banking counters which were factoring-in at least 15 years timeline for the payment of AGR dues. IDFC First Bank tanked 7 per cent to hit an intra-day low of Rs 29.7 apiece on the BSE. The Bank had marked "one large telecom account" as stressed and had created 50 per cent provision against the total outstanding of Rs 3,244 crore in the quarter ended December 31, 2019. The Bank continues to carry the same provision for the account as of June 30, 2020.

That apart, IndusInd Bank, which has an exposure of around Rs 1,058.2 crore towards the telecom sector, tanked 6 per cent to Rs 589 on the BSE. Punjab National Bank, with an exposure of Rs 12,644 crore (of which NPAs are worth Rs 4,910 crore); YES Bank with an exposure of Rs 3,057 crore; ICICI Bank with Rs 17,246.6 crore; and Axis Bank with Rs 21,271 crore exposure (as on June 30, 2020) skid 3.5 per cent, 2.5 per cent, 2 per cent, and 3.4 per cent, respectively.

State Bank of India, which has an exposure of around Rs 45,033 crore (both fund and non-fund based exposure), of which Rs 5,930.94 crore was already into NPA as on March 31, 2020, was the only bank to trade in the green and gained 2.5 per cent in the intra-day trade. Nifty Bank index slipped 1.1 per cent in the intra-day deals, as against 0.01 per cent dip in the Nifty50 index. Most of these counters, however, recovered after a knee-jerk reaction.

Analysts, however, do not see the AGR payment timeline too negative for the sector.

Siddharth Purohit, equity analyst at SMC Securities, calls the verdict "neutral" and says that while banks were expecting 15-20 years' time frame, the period given in the verdict gives banks enough time to create further provisioning, if required.

"Some banks have already created provision for Vodafone Idea, while some may use this 10-years period to create further provisioning. Thus it may not dent the financial position much... That apart, even Vodafone Idea might use this period to revive itself. Therefore, investors should not see this verdict as negative from banks' perspective," he says.

G Chokkalingam, founder of Equinomics Research and Advisory, on the other hand, believes that the 10-year time frame might lead to NPA addition over the next one-two years as servicing government's debt obligation will take precedence over clearing banks' dues. Therefore, banks with higher exposure towards Vodafone Idea might suffer in the short-term.

Overhang on bank stocks to remain

Apart from the AGR verdict, the uncertainty over interest waiver case and extension of moratorium are the key drags for the sector, analysts say.

The Central government, through Solicitor General Tushar Mehta, told the Bench of Justices Ashok Bhushan, R Subhash Reddy and MR Shah on Tuesday that the moratorium is capable of being extended by up to two years. However, no formal decision has been taken on this aspect yet.

The submission was made in Court when an intervenor sought to make arguments for the extension of the moratorium beyond August 31. The apex court has now adjourned the hearing till Wednesday in the interest waiver case and has asked the government and banks to consult and formalise the position on the same.

In June, the Court had asked the Centre and the RBI to review the move to charge interest on loan repayment during the moratorium period introduced in light of the Covid-19 pandemic.

"Short-to-medium term looks challenging for the banking sector as there are concerns with respect to moratorium and interest waiver case... Investors should avoid entering the market at current levels, but may choose to buy on dips as the sector is expected to remain volatile," says Purohit.

Fresh buying is unlikely to come in the bank stocks as investors are in wait and watch mode, says Jaikishan Parmar, senior equity research analyst at Angel Broking, as the SC is due to hear the interest charged on the interest component for the moratorium tomorrow.

"While the AGR verdict is one of the key events for the banking sector, it will not overall alter the banking sector outlook. Banks with high exposure could remain under pressure for some time due to the lower 10 years staggered payment compared to expected 15/20 years. However, in the short-term, hearing on interest charged on the interest component for the moratorium will drive the sector move. For the next six-months, the banking sector's fate will depend on how much of the moratorium loan slips into GNPA and restructuring book," he says.