Religare downgrades ICICI Bank, Axis and SBI

Religare downgrades ICICI Bank, SBI and Axis Bank to sell on NPA concerns:



The Strategic Debt Restructuring scheme - an ammunition that gives banks right to control majority stake of defaulting borrowers - will not solve the issues related to stressed loans but on the contrary it will result in lenders postponing recognition of Rs 1.5 lakh crore as problem loans to later years.
This is predicted in a report released by Religare Capital today which estimates that several SDR or Strategic Debt Restructuring cases would fail resulting in formation of huge non-performing assets in years to come. The brokerage in its report has downgraded State Bank of India, ICICI Bank and Axis Bank from 'buy' to 'sell'. Bank of Baroda, Canara Bank and Punjab National Bank were downgrades from 'hold' to 'sell.'
SDR allows banks to acquire 51% stake in a troubled companies by converting debt into equity. But, within 18 months of initiating SDR, banks have to find a buyer for their stake. Interestingly during these 18 months, banks can classify the loan as a standard asset.
The report says that over next one year banks may refinance close to 30-40 corporates having Rs 1.5 lakh crore of loans under the SDR. "Most of these are coming out of a standard restructuring moratorium and would have slipped into NPA, but for banks' recourse to SDR. In effect, SDR does not solve the problem of ballooning bad assets in India's banking system, but merely exacerbates it by postponing and obscuring true NPA recognition," said that Religare report - 'SDR - A band aid for bullet wounds' authored by Parag Jariwala and Vikesh Mehta.
The analysts estimates that whether restructuring packages such as SDR and 5:25 succeed or not, write-offs are unavoidable. "If an SDR package fails, the concerned account will slip into NPA and attract high provisioning requirements (35-95%). In the unlikely event of success, banks are still likely to suffer a substantial haircut on the enterprise value of ailing entities upon takeover," it said.
Justifying the Rs 1.5 lakh crore figure that could come under SDR, the report explains that of the Rs 3.5 lakh crore that is restructured, half of it would be upgraded into standard loans, 25% may be downgraded into non-performing loans and the balance 25% may come under SDR. The report questions the success of corporate debt restructuring - a forum where lenders and borrower would mutual work towards reviving a troubled unit - while stating that 36% of the total debt restructured on September 2015 has failed.
The report also points out that lenders debt levels would rise by 20% under SDR in order to keep the unit running for 18 months until they get new buyers. This could include funding interest costs, working capital, meeting guarantees invoked by state governments or developers for delayed project completion.
"Upon conclusion of the SDR process, debt is expected to surge 70% from the date of first restructuring. In the event the SDR or 5:25 scheme fails, the impact on banks' profitability due to interest reversal, higher slippages and credit cost will be severe," says the report.