BackPublic sector banks gain over past month
Shares of most public sector banks have gained between 16% and 50% over the last one month, with Indian Bank gaining the most
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Shares of public sector banks (PSBs), which were beaten down by weak profitability and poor asset quality have picked up in the last one month as investors believe the efforts of the government and the Reserve Bank of India (RBI) will alleviate some pressures.
Shares of most public sector lenders have gained between 16% and 50% over the last one month, with Indian Bank notching the highest gain of 50% in its share price. The bank stock indices on both BSE and the National Stock Exchange (NSE) have gained more than 1% in the same period.
RBI introduced a new scheme of loan restructuring earlier this month, in which the exposure of banks to a borrower is split into sustainable and unsustainable debt. The unsustainable debt, which could be up to half of the total exposure, can be converted into equity or quasi-equity instruments. Lenders will have to make provisions to the extent of 20% of the total outstanding amount or 40% of the amount of debt that is seen as unsustainable. This gives banks some relief from the 100% provisioning required for bad loans over a three-year period.
“We still have a negative on PSBs. But over the last couple of weeks, some positives have emerged. First, the watch list of loans that State Bank of India (SBI) gave at its results was smaller than what the market expected. This means that the pressure on asset quality is reducing. Second, RBI’s new norms will reduce the burden of provisioning on banks as once the borrower or project starts performing, the loans can be classified as standard. It also shows that RBI is willing to lend a hand for genuine borrowers," said Siddharth Purohit, an analyst at Angel Broking.
ICICI Securities said the new rules are positive for banks as it gives them space to manoeuvre out of strategic debt restructuring accounts without necessarily changing the promoter. “This is positive for banking industry, although we may see some initial impact of higher provisioning in FY17 estimates," it said in a note dated 15 May.
Another positive has been the swiftness in which the merger of the associate banks of State Bank of India (SBI) with the parent was approved. On 17 May, the boards of all associate banks and SBI met to discuss the process of merger. Within a month, the plan was approved by the cabinet. This is being seen as part of the government’s move to speed up consolidation in the banking sector.
Shares of SBI’s associates soared after the merger announcement, with State Bank of Mysore gaining the most at 47%. Shares of SBI have since risen nearly 26%.
Nevertheless, bank shares are still far from their 2014 peaks and investors are still cautious on the outlook. “I wouldn’t put too much weight on the recent rally as it could be because of an increase in liquidity. The underlying view has still not changed on banks," said an analyst with a brokerage firm, requesting anonymity.
Analysts at Religare Capital Markets have warned that the watch lists of loans detailed by some lenders do not disclose the full stress. “We will be closely watching the source of slippages emerging in Q2 and Q3 of FY17 for further evidence of the authenticity or lack thereof of bank watch lists," the analysts wrote in a note dated 13 June.
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