Banks’ NPA problem not over till the fat lady sings

With earnings yet to show meaningful improvement, and investment demand some time away, private lenders will continue feeling the heat


When quarter after quarter the majority of large listed companies are posting poor financial results, how can private sector lenders such as ICICI Bank and Axis Bank who, too, lent to these firms be out of trouble? Photo: Pradeep Gaur/Mint
When quarter after quarter the majority of large listed companies are posting poor financial results, how can private sector lenders such as ICICI Bank and Axis Bank who, too, lent to these firms be out of trouble? Photo: Pradeep Gaur/Mint

With the wisdom of hindsight, it should have been an obvious question. When quarter after quarter the majority of large listed companies are posting poor financial results, how can private sector lenders who, too, lent to these firms be out of trouble?

To be sure, the market has always had lingering concerns on the asset quality of some lenders such as ICICI Bank Ltd and Axis Bank even when they were doing well in other yardsticks such as credit growth or margins or net profit growth. That’s why these two banks had traded at a good discount to HDFC Bank Ltd, which has predominantly retail loans in its portfolio.

Some of these fears have come true in recent times.

For Axis Bank Ltd, gross bad loans rose 36.7% to Rs.6,087 crore in the six months ended 31 March. For ICICI Bank, bad loans have risen by almost two-thirds in the same period to Rs.26,221 crore. And investors have shown their displeasure by beating down share prices more than the benchmark Bankex since the company reported its September quarter earnings. Axis Bank has lost 10% of its value and ICICI Bank almost 20%.

Now, both banks have decided to share more information about potential stressed assets rather than let market speculation run riot. Those numbers show that things have not turned the corner.

Axis Bank created an asset quality “watch list” of Rs.22,268 crore loans that are likely to be the source of future stress. Of this, it expects 60%, or Rs.13,361 crore, to go bad over the next two years, a number higher than the combined slippages of the past two fiscal years.

ICICI Bank’s watch list is more than double the size at Rs.52,638 crore. This includes already restructured loans of Rs.8,573 crore, loans under the strategic debt restructuring process (SDR) and 5/25 refinancing scheme. Overall, the bank has indicated that it has about 13.3% exposure (including non-funded exposures) in stressed sectors such as power, mining, iron and steel, cement and rigs. Of this, 4.8%, or Rs.44,000 crore, are at high risk and may slip into NPAs in the coming quarters. Therefore, the bank has created a reserve of Rs.3,600 crore as contingency provisions against this exposure.

This grim outlook will also have a bearing on other yardsticks such as credit growth and profitability. ICICI Bank, for instance, has guided for 5-7% growth in corporate loans as it switches its focus to higher rated firms and reduces concentration risks in its portfolio. This will naturally dent margins as well.

With private corporate earnings yet to show a meaningful improvement, and investment demand some time away amid the highest level of stalled projects in a couple of years, these lenders will continue feeling the heat.

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