Sector Update | 10
| Financials
Sector Update
June 2020
Financials
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SC to hear interest waiver case on 12th June
Judgment to have significant implications for banking system
In a recent set of events, the Honorable Supreme Court (SC) has asked the RBI and Finance
Ministry to file a joint response on a plea seeking an interest waiver during the
moratorium period. This follows the RBI’s earlier affidavit in response to the SC’s notice on
PIL seeking an interest waiver on moratorium on term loans. The RBI has argued the
interest waiver for six months on moratorium loans would be significant at ~INR2t (~15%
of the banks’ FY19 networth). While we believe the probability of an adverse ruling is
minuscule, the judgment against banks could affect financial stability and trigger capital
calls across banks.
Banks have a fiduciary responsibility toward depositors to pay interest, and losing out on
such massive interest income could affect their ability to meet their obligations to
depositors. This may jeopardize the faith in the banking system, which is recovering well
after witnessing shocks at certain other universal/co-operative banks. As much as it
appears to be a Black Swan event, further developments on the case still remain key
monitorables. This is more so as in the past, SC judgments in specific cases have had severe
implications on the business outlook of the respective sectors (refer to page 2).
In this backdrop, we have attempted to analyze the possible effect the ruling could have
on the banking system as well as on individual banks. Our analysis shows the interest
forgone on the moratorium book for a period of six months could impact FY21 operating
profits in the range of 24–111%, while the interest foregone on the complete book could
result in operating loss across most banks.
Impact of Interest waiver on
coverage banks
FY21 (%)
Pvt Banks
DCBB
FB
AUBANK
RBK
IIB
AXSB
KMB
ICICIBC
BANDHAN
HDFCB
PSU Banks
BoB
SBIN
PNB
Interest waiver as a
% of PPoP
On Morat On Total
book
book
111.3%
56.6%
30.5%
39.6%
35.3%
29.1%
26.0%
28.9%
68.3%
24.5%
95.9%
30.7%
78.2%
185.5%
161.6%
121.9%
119.9%
113.8%
104.0%
100.2%
96.4%
96.2%
87.3%
147.6%
133.5%
120.4%
Chronology of events
•Pleae filed with SC
•Request for
interest waiver
during moratorium
period
27th Mar'20
•SC issues notice
asking for RBI's
26rh May'20
reposne
3rd Jun'20
•RBI files an
affidavit against
the interest waiver
4th Jun'20
•SC asks a joint
reponse from RBI
and Fin Min
Snapshot of the entire plea; next hearing scheduled for 12
th
June
In response to a PIL filed in the SC, the court had sought a response from the RBI
on 26
th
May on the plea seeking an interest waiver on moratorium loans. The
RBI thus filed its affidavit on 3
rd
June, arguing that the forced waiver of interest
could risk the financial stability of banks and put depositors’ interest in
jeopardy.
The central bank further argued that this could cause severe financial
implications as ~INR39t of loans are currently under moratorium, and as per its
assessment, an interest waiver for six months on the moratorium book could
amount to ~INR2t for the banking system (~15% of the banks’ FY19 networth).
The RBI further highlighted the intention to offer moratorium during the
lockdown period was to ease the cash burden on borrowers and give them
some time to normalize their cash flows / businesses.
However, the SC argued that granting moratorium without an interest waiver
could be detrimental for many borrowers in the current pandemic, and the
economic aspect should not be higher than the health of the people. Thus, it has
asked the RBI and Finance Ministry to submit a joint response and scheduled the
next hearing on 12
th
June’20.
Black Swan event – significant implications for banking system
While we believe the probability of such a ruling is minuscule, wherein the interest
is completely waived, unfavorable judgment could affect the financial stability of the
Banking sector and trigger capital calls across banks. Banks have a fiduciary
12th Jun'20
•Next hearing
schedluled for 12th
Jun'20
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
Himanshu Taluja
(Himanshu.Taluja@motilaloswal.com)
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com);
Yash Agarwal
(Yash.Agarwal@motilaloswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
10 June 2020
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Sector Update | Financials
responsibility toward depositors to pay interest, and losing out on such massive
interest income could affect their ability to meet obligations to depositors, thus
shaking the confidence in the banking system.
Waiver of interest on the
entire portfolio for a period
of three months could
impact FY21 operating
profits in the range of 44–
93% across banks, while for
six months, this could result
in operating loss for most
banks.
Few historic judgments by SC on other sectors
Ruling on AGR liability for telecom operators (2019):
SC had critically dismissed
a review petition filed by telecom companies to grant relief on massive AGR
liabilities amounting to ~INR920b, which questioned the ability for survival of
one of the leading telecom players. Moreover, it ruled out any reassessment or
self-assessment of AGR’s liabilities by the companies and maintained that the
operators would have to pay their entire dues. The matter is now awaiting the
SC’s hearing on the DoT proposal for a staggered payment of dues over a period
of 20 years at an MCLR rate of 8%.
Quashed allocation of coal blocks (2014):
In 2014, the SC has quashed the
allocation of ~214 coal blocks that severely impacted the Power, Steel, and
Mining sectors. This also had an impact on the Banking sector, and several banks
are still grappling with asset quality issues due to this judgment.
Mining ban in Goa (2012):
The SC had earlier banned mining operations in Goa
claiming illegal mining was taking place. It was held that mining leases suffered
from multiple illegalities. Mining firms were even restrained from exporting and
selling ores already extracted. This led to financial difficulties for companies and
job losses. In 2018, the SC once again quashed the second renewal of iron ore
mining leases given to 88 companies in Goa in 2015, resulting in further
hardships. This was the second instance of illegal mining brought before the SC
wherein the court had kept mining operations on hold for over a year in
Karnataka.
Adverse judgment could impact PPoP in the range of 25–111%
We have attempted to assess the impact of this judgment on our coverage universe.
Many large banks have a proportion of moratorium loans ranging between 25–35%
(in value terms). On the other hand, for small and mid-sized banks, the moratorium
has been much higher. For Equitas/Ujjivan, the moratorium book stands at
93%/90%, while for BANDHAN/DCBB, it is at ~71%/60% of the total loan portfolio.
Waiver of interest on the moratorium book for a period of three months could
impact FY21 operating profits in the range of 12–56%. Conversely, for six months,
this could impact operating profits in the range of 24–111% across banks.
s
Waiver of interest on the
moratorium book for a
period of three months
could impact FY21
operating profits in the
range of 12–56%, while for
six months, this could
impact operating profits in
the range of 24–111%
across banks.
View
While we believe the probability of an unfavorable ruling is minuscule, this
nevertheless remains an important event to watch for. Adverse judgment could
affect the financial stability of the Banking sector and trigger capital calls across
several banks. This may also dent depositors’ trust in the banking system as several
banks with a high proportion of moratorium loans may find themselves unable to
honor their obligations to depositors. Any judgment on interest waivers also needs
to consider whether the waiver should be made available only to customers who
sought moratorium or even others who, despite facing hardships/lockdown,
continued paying their monthly dues. Also, as a fair proportion of lending happens
outside banks, from NBFCs and other lenders, the judgment would have implications
for these entities as well. Loan waivers in the past have impacted credit behavior,
and thus this event becomes even more important from a credit behavior
perspective within both moratorium and regular-paying loans.
We maintain our
preference for large banks: ICICIBC, HDFCB, and SBIN.
10 June 2020
2
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 1: Chronology of events in the interest waiver plea at the Supreme Court
Date
27 Mar’20
26 May’20
3 June’20
4 June’20
th
rd
th
th
Events
A plea was filed by Mr Gajendra Sharma to forego interest during the moratorium period.
The court asked the RBI to respond to the plea seeking an interest waiver on the moratorium on term loans.
The RBI filed a counter-affidavit against the interest waiver.
The SC asked the Finance Ministry to intervene and submit a joint response with the RBI; the next hearing is scheduled on
12th June’20.
Source: Media articles, MOFSL
Moratorium book for the
banking system stands at
~39% of the total book.
Exhibit 2: As per the RBI’s assessment, an interest waiver for six months on moratorium
loans could impact the banking system by ~INR2t, equating to ~15% of the systemic
networth
Systemic level
Advances as of Feb'20
Moratorium availed (%)
Moratorium book
Monthly interest waiver
Total interest waiver for six months
Total networth as of FY19
Interest waiver as a percentage of networth
INR t
101.0
39%
38.6
0.34
2.01
13.31
15%
Source: RBI, MOFSL, Media articles
Exhibit 3:
Networth of PSU and private banks
PSU Banks
Pvt Banks
Exhibit 4:
Banking system networth INR13.3t as of FY19
Net Worth (INRt)
FY16
FY17
FY18
FY19
Source: RBI, MOFSL
FY15
FY16
FY17
FY18
FY19
Source: RBI, MOFSL
For many large banks, the proportion of moratorium loans ranges between 25–35%
(in value terms), while for small and mid-sized banks, the moratorium has been
much higher. For Equitas/Ujjivan, the moratorium book stands at 93%/90%, while
for BANDHAN/DCBB, it is at ~71%/60% of the total loan portfolio. The MFI segment
witnessed 100% moratorium. Other segments that witnessed a higher number of
borrowers availing the moratorium were CV, 2W, MSMEs, and Small Business Loans.
10 June 2020
3
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 5: Snapshot of moratorium availed by customers and COVID-19-related provisions made by banks
Provisions
as a % of
COVID-19/Standstill-
FY20 (INR b)
Advances
customers
as a % of loans In value terms
related
Contingent
Total
AXSB
5,714.2
10%-12%
25%-28%
1,428.6
30.0
29.8
59.8
BANDHAN
666.3
NA
~71%
473.1
6.9
NA
6.9
DCBB
253.5
NA
~60%
152.1
0.6
1.0
1.6
HDFCB**
9,937.0
NA
NA
NA
15.5
44.5
60.0
ICICIBC
6,452.9
NA
~30%
1,935.9
27.3
NA
27.3
IIB*
2,067.8
NA
~5%
57.7
2.8
NA
2.8
KMB
2,197.5
NA
~26%
571.3
6.5
NA
6.5
YES
1,714.4
15%-25%
35%-45%
685.8
2.4
NA
2.4
FB
1,222.7
NA
~35%
427.9
0.9
0.1
1.0
RBK
580.2
NA
~33%
191.5
1.2
NA
1.2
AUBANK
269.9
~29%
~25%
67.5
1.4
NA
1.4
Equitas
137.5
~98.3%
~93%
127.8
1.0
NA
1.0
UJJIVAN
140.4
NA
~90%
126.4
0.7
NA
0.7
SBIN***
23,252.9
~22%
~23%
5,348.2
9.4
NA
9.4
SBI Cards
228.1
~20%
~17%
38.0
4.9
NA
4.9
*For IIB, the proportion of customers availing moratorium is as a proportion of vehicle financing, MFI and unsecured loans. The bank indicated
that very few corporates have applied for the moratorium; **For HDFCB, Contingent provisions includes floating provision of INR14.5b
***For SBIN, moratorium book does not include Agri segment while no clarity on inclusion of working capital loans
Source: MOFSL, Company
Moratorium availed
An interest waiver on
moratorium loans for a
period of 6M could result in
loss for PSUs and mid-sized
banks, while large private
banks would be impacted
by 35–74%
Exhibit 6: Interest waiver on moratorium book could erode 12–56% of PPoP for 3M; 24–
111% of PPoP for 6M waiver
Interest foregone for 3M
Interest foregone for 6M
% of PPoP
% of PBT
% of PPoP
% of PBT
AXSB
14.6%
36.9%
29.1%
73.8%
DCBB
55.7%
141.0%
111.3%
281.9%
BANDHAN
34.1%
48.6%
68.3%
97.2%
HDFCB*
12.2%
17.4%
24.5%
34.8%
ICICIBC
14.5%
28.1%
28.9%
56.2%
IIB*
17.6%
29.4%
35.3%
58.8%
KMB
13.0%
18.1%
26.0%
36.2%
FB
28.3%
64.4%
56.6%
128.9%
RBK
19.8%
77.6%
39.6%
155.2%
AUBANK
15.2%
23.7%
30.5%
47.5%
BoB
48.0%
240.7%
95.9%
481.4%
PNB
39.1%
183.3%
78.2%
366.6%
SBIN
15.3%
51.6%
30.7%
103.2%
Note: We have taken respective banks YoA for purpose of interest calculations.
Actual impact may vary
given the assumptions in our calculation.
*For HDFCB and IIB we have taken the average moratorium
of private banks for the purpose of our calculation.
Source: MOFSL, Company
FY21 (%)
An interest waiver even for
a period of 3M could result
in loss for PSUs, mid-sized
banks, and AXSB among the
large private banks; while,
this would significantly
impact other large private
banks as well
Exhibit 7: Interest waiver on entire loan book could erode 44–93% of PPoP for 3M, while it
could result in operating loss for most banks under 6M waiver
Interest foregone for 3M
Interest foregone for 6M
% of PPoP
% of PBT
% of PPoP
% of PBT
AXSB
52.0%
131.8%
104.0%
263.6%
DCBB
92.8%
234.9%
185.5%
469.9%
BANDHAN
48.1%
68.4%
96.2%
136.9%
HDFCB
43.7%
62.2%
87.3%
124.4%
ICICIBC
48.2%
93.7%
96.4%
187.4%
IIB
56.9%
94.9%
113.8%
189.8%
KMB
50.1%
69.6%
100.2%
139.1%
FB
80.8%
184.1%
161.6%
368.2%
RBK
60.0%
235.2%
119.9%
470.4%
AUBANK
60.9%
94.9%
121.9%
189.8%
BoB
73.8%
370.3%
147.6%
740.6%
PNB
60.2%
282.0%
120.4%
564.0%
SBIN
66.7%
224.1%
133.5%
448.8%
Note: We have taken respective banks YoA for purpose of interest calculations.
Actual impact may vary
given the assumptions in our calculation. Source: MOFSL, Company
FY21 (%)
10 June 2020
4
 Motilal Oswal Financial Services
Sector Update | Financials
NOTES
10 June 2020
5
 Motilal Oswal Financial Services
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
Sector Update | Financials
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
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completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
MOFSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to
perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should
take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the
analyst, and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person
or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or residen t of or located in any locality, state, country or other jurisdiction, where such
distribution, publication, availability or use would be contrary to law, regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall
be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically agrees
to exempt MOFSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold
MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-30801085.
Registration details of group entities: MOFSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100.Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409)
offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate
products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
*MOFSL
has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench. The existing registration no(s) of
MOFSL would be used until receipt of new MOFSL registration numbers.
10 June 2020
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