Power loans stress in banking: Why Nomura is not very worried

Banks have been facing issues of non-performing assets (NPAs) for a while now. While the overall NPA recognition has picked up pace in FY16, low NPA recognition in the power sector has raised investors’ concerns as the next source of stress for banks, Nomura has said in a report. It prefers ICICI Bank and State Bank of India in the sector. The research firm estimates power stress to be at Rs 2.3 lakh crore and this data corroborates with CRISIL’s bottom-up assessment of Rs 2.1 lakh crore of power stress, implying a rise to 35 percent stress levels in power. On NPA recognition, the research firm believed that it was peaking in many sectors. “NPA levels for our covered banks in the power sector are just 7.8 percent of power loans against 30-35 percent stress levels, indicating low NPA recognition,” it said in its report. But, it also felt that power stress was largely factored in. “Stress levels of banks identified by banks is 40 percent which is similar to our/CRISIL bottom-up analysis. Hence, we believe that while power stress has not yet turned NPA, it is well factored into non-NPA stress books of our covered corporate banks,” it highlighted in its report.For the issues plaguing the sector, the research firm felt that while coal supply had improved, lack of power purchase agreements (PPAs), aggressive bidding, low merchant rates and gas shortages continue to impact power loans. On power stress in SBI, Nomura estimates this to be at 18 percent of power loans against 40 percent for peers. “60 percent of SBI’s power book is to central/state government generation companies, and hence, on a relative basis SBI’s stress is half that of peers,” the research firm said in a report.