Mumbai: Banking shares,which are already roiled by high interest rates, slowing growth anda rise in non-performing assets, may face a risk from exposure to off-balance sheet items, research from Macquarie Equities shows. Private banks, although they have been more profitable in recent times, fare worse in terms of asset quality due to more number of risky assets.
Off-balance sheet items are obligations, liabilities or financing activity which the companies tend to keep off their books in order to make their balance sheets look better.
Macquarie Equities Research in a report said, “Over the past two years, contingent liabilities have increased substantially for the banking sector and private banks in general have larger proportion of off – balance sheet items, compared to PSUs.” Contingent Liabilities are obligations to pay a certain sum depending on the future events.
Contingent liabilities for private banks grew at 54% compared to 34% on average for the PSU banks between FY09 to FY11.
Moreover, stress on the asset quality of private banks such as the Axis Bank and ICICI Bank would increase because of the large exposure to guarantees and a substantial rise in the non-fund based exposure to the power sector, said Macquarie Research. Non-fund based exposure is a credit facility which is extended generally by private banks where there is no actual lending involved. For example, a credit guarantee where in banks would have to payin case the lender defaults.
Non-fund based exposure as a percent of net worth is very high for Axis Bank, at 57% followed by Yes Bank (49%), Punjab National Bank (23%) and ICICI Bank (18%).
It is already known that the power sector is grappling with crisis of coal shortages leading to un-utilized capacities and low tariffs which is affecting the profitability of the companies. If the power company defaults, the lender will catch the neck of the banks who have issued guarantees on their behalf.
ICICI Bank and Axis Bank rank poorly because theserisk-weighted assets as a proportion of assets stand at 83% on average compared to 74% for the other private sector peersand 62% for public sector lenders.
RWA are assets such as letter of credit which are more risky compared to a loan which is secured with a collateral. The RWA helps in gauging the asset quality of the bank.
Moreover, to make matters worse, the gross non-performing assets of Axis Bank advanced 30% year-on-year and 10.8% quarter-on-quarter. On the other hand, provisioning surged 7.1% y-o-y and 130.7% q-o-q. Giving the high exposure to the power sector and guarantees worth 60% of net-worth, these issues may be a spoiler forbanks’ earnings.
On the other hand,PSU banks except State Bank of India and Punjab National Bank are better off because they are involved in “plain vanilla lending,” and they have limited expertise in carrying out off-balance sheet activities, the report said.