Editorial: Banking on India

Mar 08 2014, 04:32 IST
Comments 0
SummaryFIIs are buying bank stocks as part of an India-play

In a slowing economy, banks have been through a rough patch in the past couple of years; indeed, it’s been a double whammy with revenues slowing and a bigger share of assets turning toxic. The latest credit data for the fortnight to February 21, showed an increase of sub-15% coming off a low base, in the midst of what is the busy season. In Q3FY14, Punjab National Bank’s loan portfolio grew by sub-10% yoy while that for ICICI Bank grew by 16% yoy. Bank managements confirmed there was virtually no demand for project finance.

As for non-performing assets (NPAs), these in aggregate now

account for more than 5% of total loans and while that might not seem threatening, it must be remembered there’s another 5% of the

system’s loans that has been restructured. While this does not mean banks will not recover these troubled assets, given how sharp the

economic downturn has been, the slippage could be as high as

25-30%. Indeed, the Street was sure credit costs were bound to increase over the next few quarters, since that was what managements were indicating, putting pressure on the bottom line. To add to their woes, the cost of funds has remained elevated. Which is why even a fortnight agomost public sector banks—which are bearing the

brunt of the slowdown and have the larger share of NPAs—were

under-performing the market; even till a month ago, PSU bank stocks were trading at a one-year forward price-to-book multiple of less than one when their private sector peers were trading at twice or thrice those multiples. Valuations at SBI had dropped to a multi-year low after the bank announced results for the December quarter. However, with FIIs having turned increasingly bullish on India on the back of opinion polls suggesting the BJP would succeed in leading a stable coalition government, bank stocks have rallied smartly. The S&P BSE Bankex, which had lost 9.4% in 2013 and was languishing in January and most of February, gained 5.35% on Friday. While private sector stars HDFC Bank and ICICI Bank were in big demand, PSU lenders such as SBI and Bank of Baroda also rallied smartly indicating how confident investors are that the economy would turn once there was a strong government in place.

The confidence appears misplaced given how starved PSU banks are for capital and the additional provisioning they are going to be required to do

Single Page Format
Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...