Indian Banks exposure to Real Estate and Infrastructure

Citigroup Global Markets has come up with a report which documents among various parameters, the loan book exposure of Indian Banks to sectors like Infrastructure and Real Estate (as a % of total loan book). Here’s the information they have gleaned from RBI website and various Company reports.

Bank Power Telecom Other Infra Total Infra Real Estate Total Exposure
Andhra Bank 21.5 0.9 NA 22.4 5 27.4
Yes bank 6.9 8.3 5.1 20.3 5.6 25.9
OBC 10.9 2.2 5.8 18.8 6.4 25.2
Canara Bank 13.3 4.4 5 22.7 NA 22.7
ICICI Bank 5 0 5.1 11.2 10.1 21.3
Central Bank NA NA 21 21 NA 21
Corporation Bank 8.3 4.1 4.7 17.1 3.4 20.5
AXIS Bank 4.4 3.9 5.8 14.1 3.5 17.6
Kotak Mahindra Bank NA NA NA 6.5 10.4 16.9
SBI 3.8 3 5.8 12.7 1.8 14.5
Union Bank 8 NA 3.1 11.1 1.8 12.9
Federal Bank 7.2 1.2 2.5 10.9 NA 10.9
BOB 2.6 2.2 3.4 8.2 2.7 10.8
HDFC Bank 2.3 1.3 NA 3.6 4 7.7

Now, we all know that with increasing interest rates, many real estate and infra companies might not be able to make regular payments and hence the NPAs on Banks’ balance sheets will increase. This in turn will lead to increase in provisioning for bad assets which in turn mean lower profits. Lower profits obviously mean lower stock prices. (Also, this will mean Banks would be very wary of lending to these companies for any new projects/working capital. So that’s another bummer for both Banks (since it would be earning less than if it lends) and the Infra/RE companies).

Anyway, the list does point out that

a) Among Govt. banks, the highest exposure to these sectors are with Andhra Bank, Oriental Bank of Commerce (OBC) and Canara Bank (Corporation bank is almost there!). The least exposures are with Bank of Baroda (BoB), Union Bank and SBI. Since the market has punished all Govt. banks equally, there is a chance of mis-pricing among these three less exposed banks.

b) Among Private banks, the highest exposure to these sectors are with ICICI Bank and Yes Bank (incidentally, Goldman Sachs has upgraded both these banks to ‘Conviction Buy’ list: hat-tip Sunil Arora). The lowest exposures are with HDFC Bank (expected) and Federal Bank.

Apart from this broad based data presentation, I do intend to hypothesize that the Infra sector is not much of a problem in terms of regular payments. Usually this sector is Govt. sponsored and regular payments to the Bank might not be so much of an issue. However, real estate is a problem and with increasing interest rates, and interest in buying homes dying down (obviously due to astronomical prices – who charges Rs.3 lac for a parking place? (they charge here in Bangalore)), these companies might not be able to make regular payments. Hence, looking through the list, it is obvious that ICICI Bank and Kotak Mahindra Bank have the highest exposure to Real Estate and hence are at a higher risk than the other banks (among Govt. Banks, it is OBC).

I also intend to crib at one aspect of the report. The Citi report downgraded Govt. banks like Andhra Bank, OBC and Canara bank due to higher Infra and RE exposure. In the same breath (and report), Citi has upgraded ICICI Bank to a ‘Buy’. You read that right. ICICI Bank – a Bank which has a higher exposure compared to most other banks (Infra and RE combined, RE alone) in the list has been upgraded to a ‘Buy’. I am not sure of the reasons behind it but the double standards don’t sound too right (they obviously are way more knowledgeable than me. Also, they might be getting some investment banking business from ICICI. God knows).

*The Citi report has ICICI combined exposure mentioned as 29.2. Not too sure how the numbers were added up. I added up Infra and RE to arrive at the number.

Disc: Own HDFC Bank.

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