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Home Blogs Kotak: Bad loans will severely effect bank margins

Kotak: Bad loans will severely effect bank margins

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Kotak Institutional Equities has recently released a report highlighting the performance of the Indian banking sector in this quarter. The report predicts that large part of bank’s performance would depend on their ability to restructure loans. The report said, "Large-ticket restructuring (primarily of SEB loans) will be the key highlight of the quarter for public banks. Recovery trends for banks are likely to be mixed. Overall earnings growth is likely to be driven by State Bank of India and large private banks." 
 
HDFC Bank, ICICI Bank and IndusInd Bank are expected to be among the better performing banks in the private sector, while State Bank of India (SBI), Bank of India and India Overseas Bank will be leading the performance chart  among Public Sector Unit (PSU) banks. It expects private banks' earnings to grow by 23% year-on-year (yoy)

The key issues that banks facing in this current economic downturn is the quantum of toxic loans that they are sitting on, especially the PSU banks. It has been a recurring issue for quite some time, but now the problem has grown by leaps and bounds. One area of particular concern is the inability of State Electricity Boards (SEBs) to pay off their debts. It is reported that they're sitting on Rs300 thousand crore of losses and bad loans combined - not a small number by any means. It is also a big number for banks to start pulling up their socks. According to the report, "We expect banks, specifically PSU banks, to report higher restructured loans as they complete select SEBs that were pending to be restructured (only 35% of the overall SEB exposure was restructured in 4QFY12). Select mid-corporate restructuring is likely to continue, as corporate balance sheets continue to remain under stress." However, it is a different story for private sector banks as their exposure to SEBs is minimal though their exposure to retail assets is significant.
 
A weak economy has taken a toll on banks' fee income, which is their core business. The report said, "We expect overall non-interest income to grow 20% yoy (14% qoq decline) primarily on the back of higher contribution from treasury income. Core fee income growth would be muted primarily due to weak business activity."

The infrastructure vertical, as expected, has taken a hit due to policy paralysis, red tape and poor implementation. The report stated, We note that there is a visible slowdown in the growth to the infrastructure vertical. As of May 2012, overall loans to infrastructure grew 13% yoy as compared to overall loan growth at 17-18% yoy".

 

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