These two banks face the biggest risk from Vodafone Idea

According to the latest borrowing numbers of the cash-strapped telecom operator, while there are several other lenders that have a higher exposure to the company in absolute amounts, Yes and IDFC First top in terms of percentage of their loan books at 2.44% and 2.9%, respectively.

This makes the exposure to Vodafone very critical for the health of their balance sheets. State Bank of India has the highest exposure to VIL at around ₹11,000 crore, but this is less than 0.5% of the state-owned bank’s loan book.

The need to raise funds has become more important and urgent for VIL after the Supreme Court rejected its appeal to allow the payment of self-assessed adjusted gross revenue (AGR) dues. VIL’s stock hit the lower circuit twice on Friday after the verdict. The telco needs to raise capital to deal with liabilities of ₹1.8 trillion. The government has demanded ₹58,254 crore as AGR dues from VIL, while the company has self-assessed this at ₹21,533 crore. Vodafone has so far paid ₹7,854 crore.

For Yes Bank, especially, any deterioration in the VIL account will have a significant impact on its already large non-performing assets (NPA) position. Though the bank reported a return to profit in Q1FY22, it had gross NPAs of 15.6% (absolute amount of ₹28,500 crore, down ₹100 crore quarter-on-quarter) in Q1, with corporate NPAs at 27%, retail up 40bps to 3.3%, SME up 20bps to 3.9% and mid-corporates at 2.8%.

“While the slippage ratio fell sharply from 7.6% to 5%, it still remains high. Incremental stress, including slippage plus restructuring, remained high at 7% of loans, though materially lower than 8.3% q-o-q. Reductions to NPLs were marginally higher than slippage leading to a marginal reduction in GNPLs. Gross non-performing exposure stood at a high 20% of loans including GNPLs of 15.6%. Standard stress loans remained high at 9% vs 8% q-o-q. Total stress loans remained high at 29%, among the highest in the sector. PCR (provision coverage ratio) on non-performing exposures stood at 67% while PCR on standard stress remained low at 5%," noted brokerage Elara Capital in a 23 July report.

On the other hand, while IDFC First Bank has the highest exposure to VIL as a percentage of its loan book, the lender had said in February 2020 that it had created a 50% provision for this account. To be sure, while the bank reported stable asset quality at the end of Q4FY21 with gross NPA at 4.15% compared with 4.18% in Q3, brokerage ICICI Direct noted that though the lender’s PCR improved to 56.2% from 52.3% q-o-q, it is still on the lower side. “Also, with the pandemic forcing lockdowns again, we may see elevated provisions, going ahead, in order to deal with incremental stress and strengthening of the balance sheet," it said.

The evolving Vodafone situation also comes at a time when IDFC Ltd has received RBI’s approval to exit as the promoter of IDFC First Bank since its five-year lock-in period has expired. This could pave the way for a potential reverse merger between IDFC Ltd and IDFC First Bank Ltd, Mint reported on 22 July.

“The Vodafone situation will be an overhang and a key thing to monitor for banks with high exposure to the telco, at a time when the second wave has impacted asset quality, especially in retail loans," said a banking analyst at a domestic brokerage, who spoke on the condition of anonymity.

Emails to IDFC First and Yes Bank did not elicit a response till press time.