Debt of 29 large companies could be restructured or may turn into NPLs.
Banking stocks have been beaten down over recent months, as fears of rising bad loans have grown. If shares of banks are trading significantly below their historical levels, is this the time for cherry picking? Not really, as analysts believe the stress isn’t over yet.
According to popular perception, banking stocks should rally as and when the Reserve Bank of India starts cutting rates. However, a section of analysts believe rate cuts are likely to be rather modest, as inflation is expected to remain above the comfort level in 2012, too. Economists expect RBI to cut 100 basis points through FY13, compared to the 425 basis points cuts effected between July 2008 and July 2009.
Given that rate cuts will be modest, there won’t be a significant impact on credit quality, which is expected to deteriorate further over the coming quarters. Barclays Capital, which has come out with a detailed report on the banking sector, expects total problem loans (gross NPAs and restructured assets) to grow from 4.9 per cent of advances for FY11 to 7.8 per cent of advances by FY14. According to Goldman Sachs, the impaired loan ratio could increase to 5.5-6 per cent by FY13. Public sector banks are seeing a jump in bad loans, as slippages in the agriculture sector are mounting on hopes of another loan waiver. Many analysts believe the issue of large borrowers is a much larger concern. Barclays Capital expects the large borrower segment to be a key driver of credit quality deterioration. Large borrowers account for a significant part of credit in India. Many of these are already showing signs of stress in the listed company space and among the SEBs.
Analysis shows that 100 big borrowers account for 70 per cent of the total debt of listed companies. Barclays Capital believes that of India’s 100 largest listed borrowers, 29 have high levels of leverage (debt/equity more than 2x).”These borrowers collectively account for a little less than a fourth of total borrowings of the 100 companies (about Rs 3 trillion out of Rs 13 trillion). For the next two and a half years, we expect debt for some of these companies to require restructuring or to become NPAs.” There will be more clarity on this over the next few quarters.
Another factor to affect earnings is credit growth, which is expected to slow down this year and in FY13. Goldman Sachs now expects lower credit growth of 14-15 per cent in FY12/FY13, as the ratio of credit growth to GDP growth falls to 0.9-1.1 times from 1.3 times on average, over the past five years on macro slowdown, policy logjam, project delays and high interest rates. Slower credit growth and lower margins will hit earnings, say analysts. Clearly, there’s more pain ahead for listed banks.
