Several private banks including Yes Bank are under deep financial stress owing to their disproportionate exposure towards specific corporates, as per a latest research report by brokerage firm Jefferies. Separately, the report talks about major risk within the banking sector while flagging the central government strategies such as bank mergers that affected their credit offtake or growth in times of economic slowdown.
The Jefferies report on India’s banks and other financial institutions, co-authored by Nilanjan Karfa and Harshit Toshniwal, analysed a set of listed corporate entities with gross debt of Rs 33 lakh crore and estimated their potential stressed exposure for the banking system at Rs 1.6 lakh crore, which is about 16% of the entire stock of non-performing assets (NPAs) with banks.
As per their valuation, among private banks, Axis Bank, ICICI and HDFC Bank are well placed and under less risk compared to Yes Bank, Kotak Bank which they have been classified as ‘Under Performing’.
As per the analysis, Yes Bank has the highest stress among banks (both private and public) with estimated stress of 54.5% of reported net worth of financial year 2018-19 with total exposure of Rs 147 billion as of 2018-19. This is followed by Bank of Baroda with 37% stress with Rs 189 billion exposure and Indusind Bank has 30.4% stress against 81 billion exposure during the same period.
Furthermore, Yes Bank also has highest exposure towards entities classified as high-risk such as Anil Dhirubhai Ambani Group (Finance), Cox & Kings, CG Power, DHFL, Essar Shipping and Mcleod Russel, which was reported as Rs 102.6 billion at the end of March 2019.
Crisis at Yes Bank started last year when Reserve Bank of India demanded the bank’s founder Rana Kapoor to step down as Chief Executive Officer, following a spat over breaches of confidentiality and regulatory guidelines revealed in their inspections. The Bank witnessed an 81% decline in its market stock price during last year and the same is the case even now.
For instance, as of October 1, nearly 40 brokerage firms have given negative ratings to Yes Bank stocks.
The Jefferies report termed the recent public sector banks merger announcement as a disappointing step taken by the government during the current economic slowdown. It pointed out that the earlier “bank mergers have resulted in a lower credit offtake (growth) owing to consolidation, and that can't be good when sentiment is weak, and the merging banks are approximately 23% of the systemic loans.”
For instance, in the case of State Bank of India (SBI), its loan growth slowed down as it prepared for the merger with its own subsidiaries. As per the data, the combined loan growth of SBI and its subsidiaries was recorded as 9% in the first quarter of 2017-18 which came down to 6%, 2.3% and 1.1% respectively in the next three quarters, the period while the banks were getting ready for complete merger. Similar is the case with the Bank of Baroda (BoB) which was merged with Dena Bank and Vijaya Bank. the growth of BOB along with merger banks fell from 10.5% in Q1 of financial year 2018-19 to 6.9% in Q4 of the financial year. The growth was recorded as 6.4% in Q1 of this financial year which is post-merger.
On the point of recent tax incentives announced by the central government -- marginal corporate tax rate cut from 35% to 25% and a lifelong incentive in the form of 17% corporate tax rate to manufacturing units, the analysts are skeptical over growth. The report noted :“Even on our most benign expectations, the earliest we may see some uplift in private sector capex is towards H2FY21 (second half of financial year 2020-21) or thereafter.”
Corporate Debt and divergence in credit ratings
The report estimated corporate debt of over 3000 entities listed on BSE (excluding companies that have already defaulted or cases where we didn't have consistent data and non- financial companies) as Rs 33 lakh crore. Of this, 38% has a prime credit rating, 36% are rated 'AA', 11% rated 'A' and the balance 14% rated 'BBB' or below. Based on the current interest coverage and debt serviceability ratio, the report points out that there is “meaningful divergence” of ratings of the entities and are “prone to further rating downgrades”.
However, it is found that the debt or interest repayment abilities of 'BBB' and below rated companies have seen an improvement.