By Gurdev Singh Virk :WSJ :2 Aug 2013
India’s slowing economic growth is starting to pinch some of its most profitable banks, and analysts expect their pain to worsen in coming months.
India’s slowing economic growth is starting to pinch some of its most profitable banks, and analysts expect their pain to worsen in coming months.
Bad loans at nonstate banks like Kotak Mahindra Bank Ltd., at HDFC Bank Ltd. and ICICI Bank Ltd. have inched up in the April to June quarter over the first three months of the year, according to their recently released earnings data. In addition, these banks have increased their provisions sharply, a sign that they expect bad loans to rise in the future. Higher provisions reduce the banks’ profits.
Stocks of these banks, which have long been favorites of foreign investors, have fallen by 5% to 16% since the beginning of July.
So far, bad loans had been rising mainly for state-run banks, like State Bank of India and Punjab National Bank, who are among the largest lenders to corporate India.
As the Indian economy has slowed, the profits of many Indian companies have fallen and their interest payment had increased because the central bank had been raising benchmark rates till late 2011Companies had taken a lot of debt during India’s boom several years ago, but are struggling to repay now that it is coming due. Kingfisher Airlines Ltd. defaulted on its debt last year, while companies like wind-turbine maker Suzlon Energy Ltd. and construction company HCC Ltd. have restructured their debt.
Ratings firm Crisil expects that the gross non-performing assets of all Indian banks would be 4% of total loans by end-March 2014 – the highest since 2005.
Most of these bad loans are being held on the books of state-run banks, who had been aggressive lenders in the recent past.
Meanwhile nonstate banks, like Kotak, HDFC Bank and ICICI Bank, lent mainly to individuals, who have in general been good about repaying their loans.
On corporate lending, these banks had been more selective. But now, even the companies they had lent to are hurting.
To be sure, the level of bad loans for the non state lenders remains small, and they aren’t at any risk of going under.
But they have increased their provisions for bad loans that could come down the road – a worrisome sign, say analysts.
In the April to June quarter, gross bad loans for Kotak Mahindra Bank rose to 9.95 billion rupees ($164 million) or 1.95% of total loans, versus 7.58 billion rupees ($125 million) or 1.55% of advances in the January-March quarter. The bank’s provisions for bad loans and other contingencies jumped as of June 30 stood at 1.7 billion rupees ($28 million), more than four times its provisions for the previous quarter.
Gross bad loans for ICICI Bank, the largest nonstate lender, rose to 100 billion rupees ($1.65 billion) or 3.23% of total loans, up from 96 billion rupees ($1.57 billion) or 3.22% in the previous quarter. Its provisions for bad loans rose to 5.93 billion rupees ($98 million), 29% greater than its provisions for the previous quarter.
HDFC Bank’s non-performing assets stood 27 billion rupees ($447 million) or 1% of loans held at the quarter ended June, versus 23 billion rupees ($384 million) 0.97% in the January to March period. HDFC Bank’s provisions rose by 75% to 5.27 billion rupees ($87 million).
Representatives for all three banks didn’t immediately respond to emails for comment.
Analysts expect the bad loans and provisions for these banks to rise further over the next year, as profits of Indian companies shrink amid slowing demand.
“Several firms are yet to be restructured, and most banks suggested the possibility of another (set of) mid-to-large corporate” loans turning bad, said a recent research note from U.S.- based Bank of America Merrill Lynch.
Analysts say this could weigh on share prices of these banks from here on.
Shares of ICICI Bank have fallen 16% over the last month to trade at 899 rupees on the Bombay Stock Exchange on Friday. HDFC Bank has lost 5% over the last month to trade at 632 rupees, while Kotak Mahindra is down 10% to 653 rupees.
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