Cyclical improvement is the key: Sector-wide unimpaired Tier 1 has improved 10 bps quarter-on-quarter to 6.1% (adjusting for net NPA and 30% of restructured assets) – SOE banks at 4.1% and private banks at 11.8%. The improvement is mostly optical as bad debts are camouflaged as security receipts (SRs) resulting from NPA sales to reconstruction companies. A cyclical rebound that will sort out the problem benefits SOE (state-owned) banks, the most.
Sector-wide impaired assets at decade highs: Aggregate of gross NPA (non-performing assets) and standard restructured assets as a percentage of common equity for the sector stands at 83% in Q1FY15, coming off the lows of 26% in FY08?reporting only a marginal drop over previous quarter. Impairments continue to be higher at SOE banks although the improvement is optical owing to the sale of NPAs to asset reconstruction companies. Our analysis is based on 33 listed banks (21 SOE banks, 6 new private banks and 7 old private banks).
Adjusted book at deep discount to reported book: A direct implication of the large impaired assets is the adjustments to the reported book value, which we believe is broadly the aggregate of the net NPAs and about 30% of the restructured assets. Our calculations suggest that SOE banks are deep in value (should there be a cyclical recovery), as the adjusted book quotes about 52% of the reported book (or a 48% discount), almost at par with what was in 2002.
Cyclical recovery to benefit SOE banks the most: Needless to say an economic recovery will be followed by improvement in asset quality, which is reflected in a much sharper growth in adjusted book than the reported book. Unfortunately, there is a dearth of data and the only known data point is the recovery seen during 2002-06. However, one thing is pretty clear to us; given the current discount on offer for SOE banks adjusted book, an economic recovery will benefit SOE banks the most.
Jefferies
