02 August 2012 Asia Pacific/India Equity Research Regional Banks (Financials) / UNDERWEIGHT India Financial Sector Research Analysts SECTOR REVIEW Ashish Gupta 91 22 6777 3895
[email protected] House of Debt Prashant Kumar 91 22 6777 3942 Figure 1: Borrowings of ten groups equivalent to 13% of bank loans
[email protected] Borrowings of 10 corporate groups 6,000 Rs bn 5,395 5,000 4,000 3,705 3,000 2,819 2,204 2,000 1,450 993 1,000 0 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company data, Credit Suisse estimates, ■ Concentration risk rising. Over last five years, Indian banks have witnessed strong (20% CAGR) loan growth. However, this has increasingly been driven by select few corporate groups; aggregate debt of these ten groups has jumped 5x in the past five years and now equates to 13% of bank loans and 98% of the banking system’s net worth. Therefore, surprisingly now in terms of the concentration risk, Indian banks rank higher than most of their Asian and BRIC counterparts. ■ Group financials stretched. With economic slowdown and largely similar sectoral exposure to sectors (power & metals) and multiple assets of each group stressed, financials of these groups are stretched. Average group debt to EBITDA for this set is 7.6x and already four of 10 have interest cover Previously published Reports (EBIT/P&L interest cost) of <1. Unwelcome clouds on the horizon ■ Some macro positives visible. Over the past few weeks, wholesale rates have moderated, domestic liquidity deficit has contracted and current account deficit Pockets of over-leverage visible appears to be narrowing.