These Banks Stock Rated Hold by Jefferies, Says NPAs a Concern

Stockpile of bad loans at $173 billion in FY17-end. India banks are saddled with Rs11.3 trillion of bad loans at the end of FY17 across various stress buckets, with SOE banks adding to 89% of the stresses. The power sector could pose a further threat to this number. Lower provisioning levels at banks would challenge RoE expansion expectations across the sector.

Aggregate stress in 41 banks put together accounted for 14.7 % of loans. The loan’s share of this was NPLs at 69%, restructured assets at 17%, 5-25 at 5%, SDR at 4%, ownership change outside SDR scheme at 1%, S4A at 1% and security receipts at 3%. That for SOE banks was no different, as they largely account for 89% of total stress in the system.

Aggregate provisioning level is 45% across the sector and only a marginal difference between SOE and private banks. Further, with 12 large stressed assets being resolved through the insolvency/ resolution process at NCLT, we are challenged to arrive at any real recovery rates or need for additional provisions – though we tend to be biased towards the latter. We believe that corporate sector-exposed banks may need significant provisioning over the next 4-6 quarters. We, therefore, are broadly conservatively positioned in owning these stocks with both ICICI Bank and Axis Bank at ‘hold’.

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