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Banks Need to Make More Provisions Due to Power And Aviation Exposure in Q4: KJMC

  • KJMC Institution Research believes Q4 FY12 will see more restructuring from the sensitive sectors like power and aviation due to which banks have to keep more provisions aside thereby hitting profitability of the banks. In power sector, specifically SEBs like Rajasthan Board, Haryana, UP are expected to be restructured by the banks in the coming quarters while in Aviation sector along with Air India and KFA, Spice Jet may also increase restructured books of the banks.

Following are the key highlights of the banking sector update report from KJMC:

  • Asset quality has been a main concern for the Indian banking sector given the fact Infra sector which was considered to be positive for the Indian economy and for the banking sector has turned out to be negative due to policy inaction from the government. Addressing these issues on priority basis is of utmost importance from the government side as it will impact overall banking sector and might derail the faster economic growth. As Supreme Court has cancelled 2G licenses, some of the telecom companies are under pressure which in turn might affect banks having exposure to these companies. Considering Telecom and Power sector to be risky assets, we have listed out the exposure of banks to these sectors.

Impact of banks exposure to telecom companies due to license cancellation:

  • Due to cancellation of 2G license many banks are facing trouble in their asset qualities. However, finance Ministry has clarified that public sector banks have no exposure which is uncovered. Total exposure of State run banks to telecom sector amounts to Rs 143.5 billion out of which Rs 33 billion relates to 122 license scrapped by SC. Out of Rs 33 billion, Rs 28.9 billion lending is to big companies such as Idea, Tata Telecom, Uninor and Videocon. Total Exposure of Banks to Telecom Companies as declared by RBI upto Dec 11 is Rs 909.7 billion in which SBI has an exposure Rs 45 billion to telecom companies whose licenses have been cancelled Out of Rs 45 billion, Rs 11 billion is fund based exposure while Rs 34 billion is non fund based exposure. Other PSU banks having telecom exposure whose licenses are cancelled are Corporation Bank Rs 1.5 billion, PNB Rs 5.1 billion. Private Banks like Yes Bank and Axis bank declined to have exposure to such accounts.

Sensitive sectors having higher debt exposure:

  • We have done analysis of Sensitive sectors like Power, Infra, Textiles, Aviation and Realty whose debt exposure is higher and might impact banks given the fact delay in execution of projects, higher oil prices and interest cost and many policy issues waiting for cabinet clearances. Due to policy issues most of the power companies are facing heat in project execution which in turn might affect banks as these companies have higher debt exposure. Also, Aviation industry is under trouble due to non availability of free cash flows and higher crude prices. Infra sector which is the most rate sensitive sector is also under pressure due to higher interest cost.

Restructured Book to increase in further quarters:

  • Restructuring book of PSU banks has been higher (range 3.8-7.4% of advances) while that of Private Banks (range 0.4-1.8%) are lower as seen in the below table. In the coming quarter, we believe more restructuring to come from SEBs resulting into higher provisions. PSU banks are expected to be affected most while private banks will be least affected.

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