The worst is far from over for Indian banks with regard to asset quality, as two large lenders that just announced their January-March earnings — ICICI Bank and Axis Bank — have put out a staggering Rs. 70,000-crore ‘watch list’ of stressed loans. A large chunk of this could potentially turn sour.
ICICI Bank, which has reported a 76 per cent decline in net profit for the January-March quarter to Rs. 702 crore, has identified five key sectors of maximum stress — power, iron and steel, mining, cement and rigs. The bank’s exposure to power and iron and steel is 10 per cent of its total loan book of Rs. 4.35 lakh crore.
The country’s largest private sector lender informed analysts during the post-earnings conference that it has internally identified loans worth Rs 44,000 crore — 10 per cent of its loan book — below investment grade.
Such loans to iron and steel and the power sector constitute 2.1 per cent of the bank’s loan book.
ICICI Bank has also said there was a net reduction of Rs. 2,000 crore in exposure in FY15-16 to companies in these sectors. N.S. Kannan, chief financial officer of ICICI Bank, while addressing analysts, said: “We expect the challenging operating and recovery environment for the corporate segment to continue in FY2017.
“The Reserve Bank of India will continue with its objective of early and conservative recognition of stress and provisioning and the approach of banks will also reflect a more conservative stance. Slippages from the restructured portfolio are expected to continue.”
Axis Bank, which reported a 1 per cent decline in its net profit to Rs. 2,154 crore in Q4, also warned about the outlook for stressed assets remaining elevated, and the operating environment being challenging.
“The bank’s outstanding on ‘Watch List’ accounts at the end of Q4 FY16 was around Rs. 22,600 crore,” it said. For Axis Bank too, iron and steel and power are the most stressed sectors, constituting almost 50 per cent of its watch list.
“We expect around 60 per cent of the watch list accounts to flow into NPAs over the next eight quarters,” the bank said, adding that while it is difficult to predict the timing of slippages precisely, a slight bias is expected during the first half of the current financial year.
Broking firm IIFL said in a note to clients: “The management (of Axis Bank) has identified loans worth Rs. 26,000 crore as stressed loans and have placed them in the watch list. Asset quality will show significant deterioration as a large portion of the loans identified by the bank as stressed flows through in FY17 and FY18.”
Both the banks have decided to beef up their contingency pool to combat bad loan pressure. While ICICI Bank has created a Rs. 3,600-crore contingency reserve, Axis Bank has added around Rs. 300 crore to the contingency pool, taking the total amount to Rs 480 crore.
The magnitude of loans under bankers’ ‘watch list’ will grow once public sector banks — that also have high exposure to stressed sectors such as steel and power — start announcing their results.
Many public sector banks had reported losses in the October-December quarter because of a surge in bad loans and the January-March quarter is expected to be no different.
Edelweiss Securities, in a research note, has highlighted four pain points for banks in the steel sector: cheaper imports, project delay, implementation because of issues related to land acquisition, clearances, and a demand slowdown.
The Edelweiss note said, “The gravity of the situation is reflected by the fact that 20 per cent of CDR (corporate debt restructuring) live cases as on FY15 are from the iron and steel industry. Further, RBI, in its Financial Stability Report states that gross NPA in the sector is at 8.4 per cent (as of the first half of FY16) and can jump to 11.5 per cent by FY17.”
