Pressure on asset quality of banks to intensify: CRISIL

Pawan Agarwal of CRISIL Ratings tells CNBC-TV18 that the pressure on asset quality of banks is set to intensify as the effect of rising non-performing assets fully hits the system. "Over the last year or so, we have seen a combination of profitability, weaker outlook on demand and weaker liquidity impact corporates, which is reflecting into defaults," he said.

CRISIL recently released a report which stated that corporate default rates were at a 10 year high of 3.6%.

Due to the high default rate, Agarwal says they as a ratings agency saw more number of downgrades than upgrades. "For the entire year, the entities that defaulted were about 188 of which more than 100 were in the second half," he said.

He goes on to say the textiles sector and the construction and engineering space saw the maximum number of downgrades.

Going forward, Agarwal says the power sector is likely to see pressure, due to which we are likely to see some restructuring.

Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: Your report clearly says that the default rate is at a 10 year high of 3.4%. Do you think it's peaking off now and as the rate cutting cycle starts we could have the default rates gradually begin to come down or do you think the pressures will continue and it's not going to come down in a hurry?

A: Our report covers about 9,000 rated entities, which represent nearly 40% of the banking industry. So it clearly is a very representative sample of what we are seeing as credit quality of corporate India. What we are seeing is that in 2011-2012, we clearly saw pressure on credit quality enhance, in the second half especially which is where the cycle conclusively changed towards more number of downgrades. We saw the number of downgrades that we were doing is more than the number of upgrades and that is something that we are seeing continuing now on a month-on-month basis.

For the entire year, the entities that defaulted were about 188 of which more than 100 were in the second half.

Typically defaults are a leading indicator of what is likely to be for the banking system because for NPAs really take about 90 days of curative period after the first default and the ratings really are the reflection of the first point of time when an entity defaults. So really some of this pressure is yet to be played out or reflected fully. Not all the defaulting entities will turn NPAs, but this is just an indicator that tells us that the pressure on the system continues to be high for now. 

Q: This statement that it is a 10 year high means this is the worse since FY03 or FY02. If that is the case, how are banks and would you expect more downgrading of banking institutions?

A: We are talking about default rates from a 10 year perspective, so this is the highest after FY03. The first part of this last decade was a period of very rapid good economic growth rate where default rates were very low, and when the economic crisis came in during 2008-2009 corporate India was helped by the restructuring window that RBI provided. So that really helped offset some of the cash flow pressures that the companies were facing.

Over the last year or so, what we have seen is a combination of profitability, weaker outlook on demand and weaker liquidity impact corporates, which is reflecting into this default study.

Yes, this is already leading into higher NPAs for banking industry. If you look at December 2011, our estimate was that NPAs were already at 2.9%. The number of cases cumulative quantum-wise, if you look restructuring, are already estimated at about 3.3% and are likely to rise in the near term. So yes the pressure on banking asset quality will intensify.

For now what holds up the credit ratings of banks is really the capital comfort that we have. The ability of the capital which is available for the banking sector is sufficient to be able to absorb this pressure in the near term.

Q: Did you witness any particular trend across sectors? Any particular sector that you feel would be weak and companies in that sector will underperform?

A: If you look at the sample of entities that faced a maximum number of downgrades last year, the three sectors that topped the list were textile, construction and engineering. These are the sectors where you not only have a high-level of debt, you also have a weaker demand coming in. So this is essentially where the pressure is likely to continue for a while.

Some sectors which are likely to continue to be under pressure are power sector, where we will see some amount of restructuring that will happen in the state power utility domain. We will see some pressure on the real estate, especially for companies that are highly indebted as well as are in commercial real estate space.

Q: Are you getting the sense that we are still young in the downgrading cycle and there is more to come or we are in the mature phase and perhaps things will bottom out?

A: I think in the near term our estimate is that the number of downgrades will continue to outnumber the number of upgrades. One of the indicators that tells me that is the fact that we have more number of ratings that are on negative outlook today. 6% of our entities that carried long term ratings are on negative outlook, which is higher than the 3% entities that are on a positive outlook. So clearly it is an indicator to us which means that we will continue to see more number of downgrades.

The pressure is likely to remain till such time that we are able to see more clearly the outlook on demand and I think that is where one of the key monitorables for us is. Second monitorable for us is going to be clearly the liquidity aspect, which is at what point of time access to funding becomes easier and less costly?

Q: Do you think it's going to be a vicious cycle because the default rate is high and asset quality pressures persist, liquidity will remain tight or do you think because the budget measures there have been relaxation of rules for foreign funding some of that part will be alleviated?

A: I think the cost and access to funding aspect has been tight now for well over a year and I think that sustained level of pressure on liquidity is one of the reasons why we see the translation into credit quality. Till such time that some of the inflationary pressures in the economy subside, some of the risks in terms of foreign exchange volatility reduce, it is likely that the liquidity position will not improve to a comfortable level. However, it is likely to certainly become better compared to where it is today.

Source: http://www.moneycontrol.com/news/market-outlook/pressureasset-qualitybanks-to-intensify-crisil_690308.html

Debt repayments worry Indian developers

Mumbai: India's biggest developers have Rs1.8 trillion (Dh126 billion) of debt maturing in the next three years as ratings firms cut or withdraw their assessments.

DLF Ltd., the nation's largest builder, was downgraded by Crisil Ltd., the Indian unit of Standard & Poor's, on December 27 after its liabilities minus cash climbed to an all-time high of Rs242.7 billion in the three months ended September 30, data compiled by Bloomberg show. Fitch Ratings withdrew its rankings last month for Unitech Ltd., the second-biggest developer which faced a funding crunch during the 2008 credit crisis.

The rising risk of defaults in India's real estate industry shows the central bank's record monetary tightening in the last two years hurt companies that are already coping with the slowest economic growth since 2009.

"Slowing cash flows in a weak economic environment and the high levels of debt may further undermine the financial status of Indian builders," Kejal Mehta, an analyst at Mumbai-based brokerage Prabhudas Lilladher Pvt., said. "Ratings remain under threat due to delays in debt reduction and the pressure on profits. Given the high rates in India, it's difficult to expect a near-term improvement in the situation."

Rising costs

Debt costs jumped at India's real estate companies as the central bank lifted its benchmark rate by 3.75 percentage points in the last two years to rein in inflation.

The central bank's repurchase rate, currently 8.5 per cent, is the highest level since 2008.

The average mortgage rate at Housing Development Finance Corp., the nation's biggest mortgage lender, is 16.5 per cent, according to the company's website.

DLF paid a record Rs5.26 billion of interest in the third quarter of 2011, up from Rs4.96 billion in the prior period, data compiled by Bloomberg show. Similar expenses rose 11 per cent to Rs1.91 billion rupees for Housing Development & Infrastructure Ltd., the nation's third-biggest builder.

"In 2012, a number of distressed projects will be acquired by large developers at sub-valuation prices," Ramesh Nair, Mumbai-based managing director for western India at Jones Lang LaSalle India, said.

"Some developers are gearing up to sell their non-core land and divest their stakes in non-core businesses such as hospitality and retail."

Combined net debt

Kumar Urban Development Pvt. and Neptune Developers Ltd. borrowed at rates from 19 to 20 per cent in the second-half of 2011, according to data from the National Securities Depository Ltd.

Combined net debt of 11 Indian developers rose 19 per cent from a year earlier to Rs403 billion rupees in the three months ended September 30, according to Mumbai-based brokerage Edelweiss Securities Limited.

"Financing challenges will continue for high-risk real estate investments," Nair said. "With tighter lending policies, debt will become more expensive and many developers will seek other options for their funding needs."

DLF signed a Rs4 billion loan due in 2015 to refinance existing debt, data compiled by Bloomberg showed last week.

Rupee-denominated bonds returned 6.9 per cent in the past year, while Indonesian notes earned 20.2 per cent in the best performance among 10 Asian local-currency debt markets tracked by HSBC Holdings Plc.

Builders face liquidity crunch

Mumbai: Property demand has slumped in India's biggest cities as borrowing costs rose and economic growth slowed.

Home sales in Mumbai dropped 20 per cent in November from a year earlier to a 31-month low, according to Prabhudas Lilladher.

Sales dropped because of "a stalemate between the buyers and the builders," Samantak Das, Mumbai-based head of research at the Indian unit of Knight Frank LLP, wrote in a note.

Profits at Indian developers shrank 23 per cent last quarter from a year earlier, after falling 20 per cent in the three months ended June 30, according to Edelweiss. Net income at DLF slid 11 per cent to Rs3.72 billion in the quarter ended September 30 from a year earlier.

"Liquidity concerns remain a challenge for developers," Samir Jasuja, CEO at PropEquity, a Gurgaon-based real estate data and analytics provider, said. "Banks are already going slow on realty lending."

Source: http://gulfnews.com/business/property/international/debt-repayments-worry-indian-developers-1.965090

India Inc's interest paying ability dips to five-year low: Crisil

The interest paying ability of companies (excluding banking, financial services and insurance, and public sector oil marketing companies) in the S&P CNX 500 Index has dipped to a five-year low due to high interest rates and a decline in operating profits, according to a Crisil Research report.

Interest paying ability is measured through interest coverage ratio, calculated as earnings before interest and taxes (EBIT)/ interest. The median interest coverage ratio fell to 4.8 times in the July-September 2011 quarter against 7.8 times in July-September 2010.

The average interest coverage ratio for these companies, totalling 420, in the past five years was 8.4 times.

The number of companies with an interest coverage ratio below two times rose sharply to 117 in July-September 2011 from 69 in July-September 2010.

SLOWDOWN FACTOR

“While the interest rate cycle has largely peaked, we believe that interest coverage ratio will remain under pressure over the next few quarters as corporate India's sales growth could slow down on the heels of lower GDP growth,” said the Crisil report.

According to Ms Roopa Kudva, Managing Director and CEO, Crisil, “While interest coverage is still healthy at 4.8 times, the magnitude of drop over the past few quarters is high. Economic uncertainty in the Western economies combined with lower GDP growth expectations at home could potentially push Indian companies into a slower revenue growth phase.

“This could increase the pressure on profit growth and result in further deterioration of interest coverage ratio.”

RISING INTEREST COST

During the July-September 2011 quarter, interest cost rose by 36 per cent year-on-year (y-o-y) for the companies under study, as the Reserve Bank of India increased interest rates to curb inflation.

The silver lining, according to per the study, is that the median debt-equity ratio (gearing) has declined marginally over the past two years.

The study also reveals that in the July-September 2011 quarter, for the first time in the past eight quarters, operating profit and reported profit after tax have declined on a y-o-y basis. The last decline was in July-September 2009 quarter, during the last financial crisis.

Rising input costs exerted pressure on profit margins, although increase in sales somewhat moderated the impact.

Mr Tarun Bhatia, Director, Capital Markets, Crisil Research, said “On a sectoral basis, FMCG, information technology and pharmaceuticals have low gearing and fare best on the basis of interest coverage metrics.

"Our study reveals that stocks in these sectors have outperformed the S&P CNX 500 Index by an average 23 per cent over the past one year. On the other hand, companies with low interest coverage ratio, in sectors like infrastructure and real estate have underperformed the index by an average 20 per cent over the past one year."

Source: http://www.thehindubusinessline.com/companies/article2771974.ece

Housing Boards, govts should create more awareness on ratings

Chennai: Ratings agency CRISIL has urged housing boards and state governments to generate more awareness on the significance of ratings in developing a real estate project, to help create a level playing field.

Though there are increasing number of real estate projects in India, lack of awareness among public and developers has led to only some takers to rate their projects, a top CRISIL official said.

"Currently there are more than 50,000 small and big real estate developers in India but only 60 of them have come forward to rate their projects," CRISIL Head, Corporate and Infrastructure Ratings Akash Deep Jyoti told media.

He said rating a real-estate project would help create a "level playing field" among developers by bringing in more "transparency" and more organised operations.

“To create awareness on value of ratings we need the support of everyone, including Housing Boards and Housing department in State Governments," he said.

Akash said many developers attract buyers by putting out huge advertisements of their future projects. However once completed, the project differs in many apsects from the promises held out to buyers, he alleged.

"The only reason developers place big advertisements in papers is to attract buyers. People invest huge amounts on buying flats or homes in such projects but may not be happy when it gets completed," he said.

Currently 107 projects developed by 60 builders have CRISIL (Credit Rating and Information Services of India Ltd) rating", he said, adding a buyer can get to know whether the developer has CRISIL rating by going through CRISIL's website.

Asked about the earlier practice of the public to invest in real estate, Akash said "People were buying properties only from referrals, a practice in vogue for centuries."

Source: http://zeenews.india.com/business/realestate/latest-news/housing-boards-govts-should-create-more-awareness-on-ratings_402.html