Home / Industry / Banking exposure to stressed firms up 85% since FY12: UBS

Mumbai: Loan approvals to potentially stressed companies have risen 85% since 2011-12 as banks continued to lend to such borrowers despite deteriorating cash flows and increased debt on their balance sheets, UBS AG said in a report on Wednesday.

The report was based on a proprietary survey conducted by UBS pertaining to a sample of around 100 potentially stressed companies, covering some $100 billion of loans. Over 7,000 collateral documents filed at the Registrar of Companies that are used to secure loans were analysed for the survey, UBS said.

According to the report, large corporations including Jaypee Group, Essar Group, GMR Group, GVK group, Lanco Infratech Ltd and Abhijeet Group have seen a significant increase in debt as well as a deterioration in cash flows and the ability to service debt during 2012-15.

“Our analysis indicates that banks continued to lend to potentially stressed companies in FY12-15, despite deteriorating cash flow and increasing leverage at the group levels. 15-20% of companies we analysed are already categorized as non-performing loans (NPLs) or have been restructured and, therefore, are already part of the banks’ impaired assets," UBS analysts Vishal Goyal, Ishank Kumar and Stephen Andrews wrote in a report dated 7 July.

The analysts added that while strong growth could be partly driven by disbursements of already approved loans for projects, banks also seem to be supporting some stressed accounts, leading to a stretched working capital cycle.

“Estimated loans approved to our sample set of companies as a percentage of FY15 loans was the highest for Yes Bank Ltd at 19%, followed by ICICI (14%) and PNB (10%)," said UBS.

The securities house added that estimated loans approved to this sample set as a percentage of net worth was the highest for Yes Bank (125%), followed by Punjab National Bank (100%) and ICICI Bank Ltd (67%). HDFC Bank Ltd had the lowest exposure at only 2% of net worth, followed by IndusInd Bank Ltd at 10%.

The implication of this trend could be higher NPLs and elevated credit costs if the economic recovery remains slow and if progress in reviving stalled projects is crimped.

Stressed advances at scheduled commercial banks in India increased to 11.1% of total advances in March from 10.7% in September, according to a recent Reserve Bank of India report. Stressed assets include gross non-performing assets (GNPAs) and loans that have been restructured by banks.

GNPAs of banks increased to 4.6% of total advances in March from 4.5% in September, the report said, adding that stress on bank books will persist in the first half of this year.

“The macro stress test of credit risk suggests that under the baseline scenario, the GNPA ratio may increase to 4.8% by September 2015 from 4.6% as of March 2015 which could subsequently improve to 4.7% by March 2016," the report said.

Data in the report suggested a majority of GNPAs (17.9%) came from industries, followed by 7.5% from the services sector.

UBS has downgraded Yes Bank and cut its price target on the stock to 740 per share. Yes Bank shares ended 7.46% lower to close at 797.35 apiece on Wednesday on BSE, while the benchmark Sensex fell 1.72% to close at 27,687.72 points.

Shares of ICICI Bank and PNB also fell. ICICI Bank shares lost 1.57% and PNB shares declined 1.82%. BSE’s banking index, the Bankex, fell 1.69% to close at 21,207.31 points.

UBS had and continues to have a neutral rating on both ICICI Bank and PNB.

ICICI Bank did not respond to an email seeking comment, while PNB executive director Ram Sangapure declined to comment because he had not seen the report.

“Yes (Bank) has reported strong asset quality so far, with its impaired loans ratio the lowest among peers at 1.2%. However, according to our study, it is most vulnerable to a large corporate default. Estimated loans to potentially stressed companies (our sample) recorded a 60% CAGR over FY12-15E and would be 125% of the net worth for Yes Bank," said UBS.

Replying to a query from Mint, a spokesman for Yes Bank said the lender “strongly refuted" the UBS report, calling it “highly publish unconfirmed, outdated data and draw misleading conclusions".

“This report has exaggerated the exposures attributed to Yes Bank given that the ROC (Registrar of Companies) filings reflect historically sanctioned amounts, which are dated and, therefore, do not reflect the actual outstanding exposures. The report compares sanction amounts to total loans outstanding as at 31 March 2015, thus presenting a distorted picture," the spokesman said.

He said Yes Bank’s net NPAs as a percentage of net advances was 0.12%, while restructured loans were 0.51% of the loan book. “The bank is confident that with the recovering economic cycle we will grow our business by 25-27% per annum over the next five years," he said.

In a separate note following the UBS report, Macquarie Capital Securities India (Pvt.) Ltd analysts Suresh Ganapathy and Sameer Bhise allayed investor fears on Yes Bank and maintained an “outperform" rating on the stock with a target price of 1,020 per share.

“If the quality of the loan book for Yes Bank is poor and collateral quality weak, then clearly the risk-weighted asset proportion which takes into account even off balance sheet activities should be much higher compared to peers...the proportion of RWA (risk weighted assets) to total assets for Yes Bank is better than average of its private sector peers over the years. In fact, in terms of RWA to total assets, YES Bank is even better than IndusInd and ICICI Bank," the Macquarie analysts wrote in the note.

P.R. Sanjai contributed to this story.

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