Russia’s state-owned oil giant Rosneft and its partners agreed to buy India’s second largest private oil firm Essar Oil in an all-cash $13 billion deal.
Indian banks soared. ICICI Bank (532174.India/IBN) led with 6.3% gain, followed by Axis Bank‘s (532215.India) 2% and State Bank of India‘s (500112.India) 1.7% gain.
This sale could help heavily-indebted Essar Group cut down its debt, analysts say. According to Nomura Securities‘ estimates, Essar Group currently has 1.2 trillion rupees of debt ($17.8 billion): Essar Oil has 300 billion rupees of debt; Essar Steel, 440 billion rupees; Essar Power, 200 billion rupees; Essar Group Fund, another 235 billion.
“Within our coverage universe, exposure to Essar Group expressed as a % of respective bank’s loan book is highest for ICICI Bank, Axis Bank, PNB and SBI,” wrote Nomura Securities’s Adarsh Parasrampuria, without giving the details.
To be sure, private-sector banks such as ICICI Bank and Axis Bank have already considered bank loans to Essar Steel and Essar Power as bad debt and chosen to sell down their exposure in Essar Steel to asset construction companies at over 50% discount, whereas state-owned banks such as State Bank of India are still dithering and treating them as non-performing loans. But, “overall resolution of stressed assets has been slow in the last six months, hence such a large deleveraging would be positive,” wrote Nomura.
ICICI also gained the most today because it has been a laggard this year, down 1% even after today’s rally. Axis Bank, by comparison, has gained 16.7%. Nomura reckons 18.4% of ICICI Bank’s loans are “stressed”, versus only 11% at Axis Bank. But markets are penalizing ICICI: It is trading at 1.7 times Nomura’s 2016 book estimate; Axis Bank is trading at 2.9 times.