IDFC First, IndusInd Bank: AGR judgement will not dent earnings, say experts

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The Supreme Court on Tuesday allowed Vodafone Idea and Bharti Airtel 10 years time to pay their outstanding adjusted gross revenue (AGR) dues, starting April 2021. The apex court asked telcos to pay 10 per cent of their dues as “upfront payment” by March 31, 2021. Remaining instalments will wish to be paid on February 7 yearly.


The judgement temporarily soured sentiment at banking counters which have been factoring-in a minimum of 15 years timeline for the payment of AGR dues. IDFC First Bank tanked 7 per cent to hit an intra-day low of Rs 29.7 apiece on the BSE. The Bank had marked “one large telecom account” as stressed and had created 50 per cent provision against the complete outstanding of Rs 3,244 crore in the quarter ended December 31, 2019. The Bank continues to carry the same provision for the account as of June 30, 2020.


That apart, IndusInd Bank, which has an exposure of around Rs 1,058.2 crore towards the telecom sector, tanked 6 per cent to Rs 589 on the BSE. Punjab National Bank, with an exposure of Rs 12,644 crore (of which NPAs are worth Rs 4,910 crore); YES Bank with an exposure of Rs 3,057 crore; ICICI Bank with Rs 17,246.6 crore; and Axis Bank with Rs 21,271 crore exposure (as on June 30, 2020) skid 3.5 per cent, 2.5 per cent, 2 per cent, and 3.4 per cent, respectively.


State Bank of India, which has an exposure of around Rs 45,033 crore (both fund and non-fund based exposure), of which Rs 5,930.94 crore was once already into NPA as on March 31, 2020, was once the only bank to commerce in the green and gained 2.5 per cent in the intra-day commerce. Nifty Bank index slipped 1.1 per cent in the intra-day deals, as against 0.01 per cent dip in the Nifty50 index. These kinds of counters, then again, retrieved after a knee-jerk reaction.


Analysts, then again, do not see the AGR payment timeline too negative for the sector.


Siddharth Purohit, fairness analyst at SMC Securities, calls the judgement “impartial” and says that while banks were expecting 15-20 years’ time period, the period provided in the judgement gives banks enough time to create further provisioning, whether required.


“Some banks have already created provision for Vodafone Idea, while some may use this 10-years period to create further provisioning. Thus it won’t dent the financial position much… That apart, even Vodafone Idea might use this period to revive itself. Due to this fact, investors will have to not see this judgement as negative from banks’ perspective,” he says.

G Chokkalingam, founder of Equinomics Research and Advisory, however, believes that the 10-year time period might lead to NPA addition over the next one-two years as servicing government’s debt obligation will take priority over clearing banks’ dues. Due to this fact, banks with higher exposure towards Vodafone Idea might suffer in the short-term.


Overhang on bank stocks to remain


Excluding the AGR judgement, the uncertainty over interest waiver case and extension of moratorium are the key drags for the sector, analysts say.


The Central government, through Solicitor General Tushar Mehta, told the Bench of Justices Ashok Bhushan, R Subhash Reddy and MR Shah on Tuesday that the moratorium is capable of being extended by up to two years. Alternatively, no formal decision has been taken on this aspect yet.


The submission was once made in Court when an intervenor sought to make arguments for the extension of the moratorium beyond August 31. The apex court has now adjourned the hearing till Wednesday in the interest waiver case and has asked the government and banks to refer to and formalise the position on the same.


In June, the Court had asked the Centre and the RBI to review the move to charge interest on loan repayment right through the moratorium period introduced in light of the Covid-19 pandemic.


“Short-to-medium term looks challenging for the banking sector as there are concerns with respect to moratorium and interest waiver case… Investors will have to keep away from entering the market at current levels, but may make a choice to shop for on dips as the sector is expected to remain volatile,” says Purohit.


Fresh buying is unlikely to come in the bank stocks as investors are in wait and watch mode, says Jaikishan Parmar, senior fairness research analyst at Angel Broking, as the SC is because of hear the interest charged on the interest component for the moratorium the following day.


“While the AGR judgement is likely one of the key events for the banking sector, it’s going to not overall alter the banking sector outlook. Banks with high exposure could remain under pressure for some time because of the lower 10 years staggered payment in comparison to expected 15/20 years. Alternatively, in the short-term, hearing on interest charged on the interest component for the moratorium will drive the sector move. For the next six-months, the banking sector’s destiny will depend on how much of the moratorium loan slips into GNPA and restructuring book,” he says.

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