Shares of banking companies have been under pressure lately after having outperformed the market sharply in preceding months. One of the concerns investors are having is about asset quality, especially in sectors such as telecom and aviation. To add to this, the asset quality of microfinance institutions (MFIs) is under pressure, after measures taken by the Andhra Pradesh (AP) government to tighten regulations governing the industry. The state accounts for around 30% of all MFI loans, and the recent ordinance issued by the AP government is expected to lead to a rise in non-performing loans for the sector.
The banking industry has exposure of around 0.5% of loans to the MFI sector, but according to Citigroup Research, for some banks, the exposure is higher. In the case of Yes Bank Ltd, for instance, the exposure is 3.6% of total loans, and for ICICI Bank Ltd and Axis Bank Ltd, it’s 1.2% of loans.
Also See Weight of Exposure (PDF)
By how much could these banks’ profit and net worth fall because of this exposure to MFIs? The Citigroup report states, “While there is clearly stress on the MFI portfolio, estimating losses at this point is challenging (and there haven’t been any defaults so far).” Even so, it has done a sensitivity analysis of the impact of non-performing loans (NPLs) in this segment on banks’ profit and book value. The analysis is for a range of losses between 10% and 50% of the MFI portfolio. At the mid-range, i.e., assuming that 30% of the MFI loans end up as NPLs, the impact is considerable in some cases.
In Yes Bank’s case, for instance, pre-tax profit for the current financial year could drop by as much as 25% and its book value by 4.2%, according to the report. In the case of ICICI Bank, the report puts the impact at 7.2% and 0.6%, respectively; for Axis Bank it’s at 5.9% and 1% and for HDFC Bank Ltd, it’s 5% and 0.8%. Among large public sector banks, the impact would be the highest for Oriental Bank of Commerce (OBC), at 5.3% of profit and 0.9% of book value.
To be sure, the banks with the highest exposure have witnessed the sharpest fall in their share price in the last week. Shares of Yes Bank fell by around 10% in the previous three trading sessions, while those of Axis Bank and OBC fell by 9% each. But even though the impact on ICICI Bank and HDFC Bank is somewhat similar to that on Axis Bank and OBC, their shares fell at a lower rate of 6% and 3.4%, respectively.
Graphic by Yogesh kumar/Mint
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