Arcelor Mittal’s buying Essar Steel through resolution process is a big relief to lenders that were strangulated by rising bad loans, tighter lending and recognition norms amid tight liquidity and sluggish credit off-take.
Laxmi Mittal owned Steel giant Arcelor has initiated the process to pay off lenders this week, which has triggered positive sentiments in banking stocks.
State Bank of India (SBI), ICICI Bank, Canara Bank, IDBI Bank, Axis Bank, Bank of Baroda and Punjab National Bank are the major beneficiaries from the Essar Steel resolution process.
The recent Supreme Court’s landmark judgment on the Essar Steel case will see healthy recoveries, which would boost their Q3 earnings.
These had a high provision cover of almost 100% on their exposure to the steel company.
Essar Steel has been a bad loan for the banking sector since March 2016, hence, most of the loan recovery will flow through their profit and loss provision write-backs and recoveries from written-off accounts.
In November, the apex court had pronounced that the resolution of Essar Steel would proceed as per the proposed resolution plan of October 2018.
The SC stated that the ultimate right of distribution of claims lies with the Committee of creditors (CoC).
Essar steel was one of 12 systemically large NPAs the RBI had directed banks to refer to NCLT in August 2017.
Financial creditors had an exposure of Rs 49,500 crore, while operational creditors’ exposure was Rs 19,700 crore.
It means that in the case of Essar Steel’s exposure to the system, secured financial creditors would have a recovery amounting to 89.8 percent on the admitted claim of Rs 45,559 crore.
As per the October 2018 resolution plan, secured financial creditors will recover 92 percent of their exposure of Rs 42,000 crore to Essar Steel while operational and unsecured creditors make very low recoveries of 2 to 4%.
SBI has the highest exposure to Essar Steel and would, thus, benefit the most from this ruling.
SBI’s admitted claims by the Resolution Professional stood at Rs 13,220.91 crore, and the CoC allocation stood at Rs 11,872 crore, SBI which translates to 89.8% recovery. Essar Steel’s account was fully written off by SBI.
ICICI Bank’s admitted claims are around Rs.2,290 crore while the CoC approved Rs 2,100 crore and assets sold to Edelweiss ARC were at Rs.1,700 crore with CoC approving Rs 1,560 crore.
On the NCLT list 1, which includes Essar, the bank has made more than 90% of the provisioning.
The SC order is being seen as bringing the rigour and momentum back into the IBC as an effective tool to deal with stressed assets in the economy.
What does this mean for the banks ahead?
We believe that the Essar Steel resolution process is a big shot in the arm for both PSU and private banks where they will be recovering a huge amount of money written off earlier. Hence this will be eps accretive and offer a good upside in the near to long term.
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