ICICI Bank, Axis Bank On The Mend But Pain Still In Store For Yes Bank, Says Macquarie’s Ganapathy

Two of India’s top three private lenders — ICICI Bank Ltd. and Axis Bank Ltd. — are slowly starting to emerge from the shadow of a grueling bad loan cycle, which has now stretched out for nearly four years. However, other lenders like Yes Bank Ltd. and IndusInd Bank Ltd. may continue to see pain for some more time, according to Macquarie Securities.

Suresh Ganapathy, head of financial sector research at Macquarie Securities, is most positive on ICICI Bank and sees material changes in the way the bank operates. In a conversation with BloombergQuint on Monday, Ganapathy said the bank has learnt its lesson over both the retail bad loan crisis of 2008-09 and the corporate bad loan crisis.

Ganapathy added that the bank has put the necessary filters in place. “With both retail and corporate sorted out, we are in for a new ICICI if we were to look for the next four-five years.”

Ganapathy, who has a ‘Buy’ call on the ICICI Bank stock, is not alone in taking a positive view on ICICI Bank. Nearly 95 percent of analysts who rate the private lender have a ‘Buy’ on it, according to Bloomberg.

New Chief Executive Office Sandeep Bakshi is also changing the management structures at the bank, Ganapathy added. Bakshi is focusing on risk-adjusted operating profit and has completely dismantled previously existing management structures to make the organisation less bureaucratic.

“He is trying to make a lot of changes and it will take at least three-four years for us to get reflected in that culture,” Ganapathy said.

The change in management and approach to business is also starting to settle in at peer Axis Bank, Ganapathy noted.

The bank, under its new CEO Amitabh Chaudhury, is also focusing on risk adjusted returns, cleaning out their corporate loan book and reducing concentration risk. All this while building out the retail portfolio.

Ganapathy has a ‘Neutral’ rating on Axis Bank, while 74 percent of analysts rate the stock as a ‘Buy’, shows Bloomberg data.

So, which of the two have a better shot at coming close to HDFC Bank in the next cycle?

The answer to that will only become clear over a 10-year horizon, said Ganapathy while pointing out that it is not easy to replicate the success of HDFC Bank.

While Axis Bank and ICICI Bank are on the mend, the road looks much tougher for Yes Bank.

Ganapathy, who terms his earlier positive view on Yes Bank as a big mistake, said the bank under-estimated the pitfalls of structured lending. This is now hurting the bank as stress on some promoter groups has built up.

According to Ganapathy, the RBI rules on promoter financing are clear and say that any such financing should be backed by strong cash flows. However, in some cases, banks have given loans to holding companies backed mostly by collateral and on the expectation that dividends received by the companies would be adequate to services the loans.

While Ravneet Gill, the new chief executive at Yes Bank, has identified a watch list of stressed loans and is working to raise capital to aid the clean-up, this will take time, said Ganapathy.

“It takes a lot of time to clean up. One cannot expect a CEO who is seven weeks into the organisation, to clean up the entire bank. So, I think there is more pain to come. Clearly over the course of next three quarters, you can see more realisation of some of the watch list that they have come out with. So, that remains a challenge,” Ganapathy said.

The spate of resignations by Yes Bank board members is also worrying, he added.

Ganapathy has an ‘Underperform’ rating on Yes Bank, in line with the majority 40 percent of analysts who currently rate the stock as a ‘Sell’. Only 33 percent of analysts rate Yes Bank as a ‘Buy’, shows Bloomberg data.

Watch the full interview below: