Moneycontrol
Oct 17, 2016 02:41 PM IST IST | Source: CNBC-TV18

If Essar is going to repay debt, ICICI to gain: Angel Broking

Essar Group lenders gain on account of relief from the Essar-Rosneft deal. Siddharth Purohit, Senior Research analyst at Angel Broking speaking to CNBC-TV18 said that it is a positive development for ICICI Bank, one of the major lenders to the group.


Essar Group lenders gain on account of relief from the Essar-Rosneft deal. Siddharth Purohit, Senior Research analyst at Angel Broking speaking to CNBC-TV18 said that it is a positive development for ICICI Bank, one of the major lenders to the group.

"It will benefit because it had sold part of their non-performing assets to one of the ARCs (Asset Reconstruction Company). If Essar is gong to repay the debt, ICICI will be able to reconigse loans and provisions can be reverseved," he said.


He also said that it is fair to assume a large part of the loans will be upgraded.


Axis Bank, another lender to Essar, also sold one of its loans to an ARC and added 50 percent discount to book value, he said.

Axis is at a better footing than ICICI bank as it has contained its slippages, and he doesn’t expect any more slippages to come from non-watchlist.

Below is the transcript of Siddharth Purohit’s interview to Ekta Batra and Prashant Nair on CNBC-TV18.

Ekta: Does ICICI Bank’s picture change for this quarter’s numbers and watch list post the Essar deal according to you?

A: Definitely, this deal is very positive for ICICI and even for other banks. Now, why ICICI possibly will benefit more compared to others is that ICICI already had sold part of the non-performing assets (NPA) to one of the asset reconstruction companies (ARC) and there is even sizeable amount of loan, which is still to be sold. So, if Essar is going to repay the debt and possibly, ICICI would be able to recognise those loans as again the payment gets started and be classified as standard again and maybe the provisions can be reversed. So, naturally, ICICI will be a large beneficiary out of this deal.

Ekta: One quick question on that just a follow up. We understand that ICICI is going to immediately benefit because of the repayment of debt on Essar Global’s books, which ICICI has exposure to. Have you done the math on that? How much is ICICI going to benefit likely on account of that particular repayment?

A: It is difficult to classify like individual banks do not do that but it is fair to assume that ICICI is a significant lender to the entire Essar Group and even out of the total proceeding, Essar Group has been saying that almost USD 5 billion will be repaid at the holding company level and also at the operating company level, that is your Essar Oil.

Having exposure to this entire group in a significant way, it is quite fair to assume that a large part of that will be repaid and also be upgraded, if at all it has been classified into NPA. So, there is a high possibility that provisions written back will happen during the current year itself and that is probably leading to change in estimate that provision requirement should come down and the asset quality should improve to large extent. And that is why market is reacting to ICICI Bank more compared to other banks. But I believe that even other banks will also tend to benefit from this deal like State Bank of India (SBI) and Axis Bank will also tend to benefit.

Prashant: Axis, any calculations, what is the exposure, any hard numbers there?

A: Axis also had sold the loan to the ARC and almost at a 50 percent discount to the book value. So Rs 1,000 crore deal had happened and going by the assumption, if one estimates that roughly 10-15 percent upfront is what normally banks receive in an ARC deal, so on a Rs 1,000 crore deal, it is fair to assume that Rs 100-150 crore would be the upfront cash and the balance amount of Rs 850 crore should come in the form of investment. So that also reduces the asset quality pressure on Axis also. But what I actually believe is that when you compare ICICI and Axis, I have a preference over Axis compared to ICICI right now.

Ekta: Do you think that the valuation gap will not narrow according to you because currently ICICI is at around 1.2-1.3 times, Axis is higher than that. Do you think that eventually the valuation gap will not narrow even despite the positive news for ICICI?

A: There is a clear difference, valuation gap between Axis and ICICI. But my estimate says that possibly Axis Bank will be in a position to early recognise all the troubled assets, whatever watch list they have given and by FY18, I believe they will be in a position to bounce back to return on equity (ROE) level of close to 16.5 percent. But I do not expect ICICI Bank to reach that level anytime soon. So I do not think that valuation gap will fill up so fast. But certainly, there is a possibility of further rerating in ICICI. But my preference towards Axis Bank is because of one fact that the slippages have been contained largely to their watch list and I am not expecting major slippages coming in from the non-watch list account and that gives me a comfort. So, we have a preference towards Axis Bank compared to ICICI Bank.

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