Kshitij Anand Moneycontrol News
To battle non-performing loan (NPL) issues across the banking sector, the Reserve Bank of India (RBI) on Tuesday identified 12 non-performing accounts or assets (NPAs), totalling 25 percent of India's gross NPAs.
Some of the large stressed accounts that could be a part of the 12 are Essar Steel with Rs 44,000 crore stressed assets, Bhushan Power (Rs 35,000 crore), Bhushan Steel (Rs 35,000 crore), Alok Industries (Rs 24,000 crore) and Electrosteel Steels (Rs 10,000 crore) etc.
Quality and speed of resolution will be key, as many tools (including NCLT proceedings) have seen limited success. “If all the 12 accounts are resolved with 60 percent haircuts, we see 8 percent upside to FY19 adjusted net worth (higher for PSUs), but earnings may face risk from credit cost towards haircuts,” CLSA said in a report.
“Banks will also need to be coordinated so the RBI had earlier amended JLF norms. In the case of PSU banks, the government is also likely to link capital infusions with targets on the resolution of stressed loans & exiting unprofitable/non-core businesses,” it said.
Most of the banking stocks both PSU and private have rallied in anticipation of some sort of resolution from the central bank. But, it is still a long drawn process and investors will be better off betting on quality stocks.
The committee also has to come up with a resolution plan (approved by 75 percent majority of the creditors) or decide to liquidate the assets. If the resolution plan is not accepted by the NCLT or no plan is formed within 180 days (can be extended by 90 days) the company would go into liquidation.
“This is a positive development and should have a positive short-term impact we believe. However, the high-NPL banks have rallied 11-24 percent YTD (Nifty 18 percent), so some of this news is likely in the price and this could dampen the short-term rally,” JPMorgan said in a report.
“These stocks have been underperforming the low-NPL, high growth banks YTD and we believe that this underperformance could persist for some time,” it said.
Here is a list of top five stocks which are likely to benefit from RBI NPL resolution:
Credit Suisse is of the view that ICICI Bank may not need further dilution to provide for these haircuts; hence, remains an attractive play.
The RBI has taken the large NPA accounts as of March 2016, which will result in 25 percent provisioning already being taken for most banks; but additional provisioning will still be needed if the resolution is to take place.
However, the immediate provisioning needs may be deferred as the RBI has stated that it would be coming out with a circular on provisioning for the cases that are referred to the IBC.
“However, as resolutions/liquidation take place over the next 6-9 months, provisioning needs will rise, precipitating the need for additional capital at corporate lenders, among which we believe only ICICI Bank may not need further dilution to provide for these haircuts,” said the Credit Suisse report.
CLSA is of the view that PSU banks will be the biggest beneficiary of RBI’s NPL resolution and Bank of Baroda (BoB) is likely to benefit more from stressed loan reduction.
“Improvement in asset quality will be most positive for PSU banks and private corporate banks where stressed loan ratios are high, at 8-20 percent. Even if resolution package requires banks to upfront haircuts, it will give a clearer path to stressed loan reduction,” said the note.
“ICICI is among our top picks in the sector given a valuation discount to peers and potential fall in stressed loans which could abate concerns. Among PSUs, while tier II PSUs may benefit more from stressed loan reduction, we prefer SBI and BOB given their stronger franchise/manageable stressed loans,” it said.
BofA-ML believes that larger lenders such as SBI are relatively better placed to benefit from this theme. In the private banking space with better provisioning and/ or retail focus lenders such as HDFC Bank, Yes Bank remain our top picks at the sector level.
The investment bank has a target price of Rs 1800 on HDFC Bank. “We believe the shares could trade at similar multiples one year out (FY19) based on our estimate of RoEs rising to 21-22 percent, CoE of 12.25 percent and growth of 9 percent,” said the report.
BofA-ML maintains a 12-month price objective of Rs393 as it believes the stock can trade at least at its cycle average or 1.6x our FY19E adj. core BV.
The asset quality is improving and SBI expects NPL formation to be within guidance. The EPS growth of 23/28 percent in FY18/19 post its balance sheet clean-up in FY16/17 with ROE rising to 7 percent by FY18 is a big positive.
BofA-ML sets a target price of Rs 2,100. The bank has sustainable long-term ROE of 22 percent, Cost of equity at 12.25 percent, and sustainable growth rate of 8 percent.
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