Indian Banks' Soaring Price-to-Truth Ratio

Why do broking firms believe lenders are all out of bad-loan cockroaches?
Photographer: Dhiraj Singh/Bloomberg
As of 12:13 AM EDT
8.30 INR
As of 12:13 AM EDT
287.40 INR

Remember the price-to-truth ratio? I coined the term three months ago for a certain kind of overvaluation of India's privately owned lenders, after three of these banks, supposedly better governed than their state rivals, had to admit that their nonperforming loans were between 20 and 557 percent more than officially reported.

Mea Culpa

The RBI forced Indian banks to give a more accurate picture of their nonperforming loans, in line with what its own audit had shown

Source: Company reports

Note: Annotations show divergence from RBI-assessed gross NPAs as percentage of reported values.

That discrepancy was because of one corporate account: a cement company that in the Indian central bank's opinion should have been identified as a bad debt back in March 2016. Luckily for the lenders, the embarrassment was short-lived. The borrower, Jaiprakash Associates Ltd., managed to sell some units to Indian billionaire Kumar Mangalam Birla's UltraTech Cement Ltd., a AAA-rated firm locally. Yes Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. have recovered the bulk of their money.

Happy ending? Hardly. Even as the Jaiprakash chapter closes, the Videocon Group saga begins. This is another overstretched Indian debtor, which went from being a humble manufacturer of television sets to providing wireless services and scouring for oil and gas in Brazil, Mozambique and Indonesia.

Videocon Industries Ltd., which is publicly traded, last reported long-term consolidated debt of $4.9 billion for the group at the end of 2015. That figure has now ballooned to almost $7 billion.

Videocon's 2020 dollar bonds crashed in May after a small Indian state-owned lender classified its exposure to the group as nonperforming in the March quarter. The notes have failed to recover since.

Washed Out

Videocon's 2020 notes tumbled after a bank classified its exposure to the group as nonperforming

Source: Bloomberg

And this week, according to CNBC-TV18, lenders may even try to push the borrower into bankruptcy.

So far, it's a predictable story of debt-addled corporate moonshots. What makes Videocon a cautionary tale is that while ICICI did downgrade the account to nonperforming in the June quarter, until now it wasn't even on its "drill-down list," which the lender uses to give investors a sense of how much more stress to expect in its corporate loan book.

What use is this show of transparency when only 9 percent of the corporate slippages in the June quarter came from the drill-down list? It's a similar story at Axis: Last fiscal year, 84 percent of the corporate loans that soured came from its so-called watch list. In the June quarter, 77 percent occurred outside of it.

The price-to-book ratio at ICICI is 1.84; it's 2.17 at Axis. For Standard Chartered Plc, which, too, has lent money to Videocon, according to BloombergQuint's interview with the group's chairman, the multiple is 0.67. Even after being repeatedly led up the garden path, investors refuse to see just how much they're paying for Indian banks, and for how little truth.

Compulsive Viewing

Videocon has $6.8 billion in loans outstanding, over and above its bonds and other obligations

Source: Bloomberg

* 2035 balance of $330 million is a letter of credit.

Writing on Smartkarma, Hemindra Hazari, an independent banking analyst, wants to know why his peers at broking firms continue to believe "they've seen the last cockroach, and there are no more to be found."  Why indeed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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