Those who believe banking stocks are value picks may want to take a more detailed look at financials. The story of asset stress cycle isn't anywhere near ending. Last Friday, the country's largest lender, State Bank of India, shocked the Street with its gross slippage figure of over Rs 10,000 crore.
Globally, investors are viewing India's banking sector with a bit of disdain, as the state-owned banks continue to "hand-hold" borrowers even in very tough economic times. No promoter loses his shirt or assets, says one analyst.
If one needs to look at the rising risks for the banking sector, it's imperative to look at the concentration of risk for Indian banks. Over the last five years, domestic banks have seen a CAGR (compounded annual growth rate ) of 20 per cent in loans.
This loan growth has been largely driven by the top 10 corporate groups. "Aggregate debt of these 10 groups has jumped five times in the past five years and now equates to 13 per cent of bank loans and 98 per cent of the banking system's net worth," says Credit Suisse.
This is not all. Not only is the concentration limited to the top 10 borrowers. Even in terms of sector exposure, most of the loans are given to metals and power players.
With most power plants facing fuel linkage issues and metals sector coming under pressure due to global slowdown, the stress in these companies is yet to become visible.
Like any slowdown, the accretion of stress in assets starts showing up from smaller players. To get a sense of how the stress levels are building, Barclays has done a study of operating free cash flows.
Given that top 100 companies account for 70 per cent of listed debt, it's imperative to understand what these companies are up to.
Anish Tawakley of Barclays says in his latest report, analysis of 13 large borrowers indicate these leveraged corporates are continuing to borrow to fund large capital expenditure, while their operational cash flow remain weak.
In aggregate, these companies generated negligible cash flow - a mere 0.4 per cent of revenues. Another argument made by other analysts is that some of these large corporates are using working capital loans to pay for interest.
However, June quarter numbers of banks don't yet reflect large corporate asset deterioration. SBI's bad loan accretion in Q1FY13 also indicates this trend. However, the stress in big corporates is not widespread yet.
