What’s killing bank stocks?

The Pak Banker - - OPINION - Ta­mal Bandy­opad­hyay

BANK stocks rose in the past two trad­ing ses­sions. Is it the so-called dead cat bounce or a short-lived rally in a de­clin­ing trend? No­body seems to have the an­swer. The Re­serve Bank of In­dia (RBI), in its Fe­bru­ary mon­e­tary pol­icy re­view, kept the pol­icy rate un­changed. Even if it cuts the rate af­ter the govern­ment com­mits it­self to fis­cal con­sol­i­da­tion in the Union bud­get, it could be the last of the rate cuts for many months to come. The­o­ret­i­cally, a rate cut could have en­cour­aged the banks to lend more and boost their in­ter­est in­come as well as bol­stered the bor­row­ers' ca­pa­bil­ity to pay back.

The worst is cer­tainly not over for many banks in terms of the qual­ity of as­sets. How­ever, the fi­nance min­istry's re­as­sur­ance that the govern­ment is fully aware of the ex­tent of the prob­lem of bad as­sets of pub­lic sec­tor banks and that it will in­fuse cap­i­tal in them has prob­a­bly soothed the frayed nerves of in­vestors. RBI gov­er­nor Raghu­ram Ra­jan has also clar­i­fied that there are other ways of push­ing up the cap­i­tal base of banks, in­clud­ing revalu­ing their as­sets.

Yet an­other con­tribut­ing fac­tor to the two­day rally could be fi­nance min­is­ter Arun Jait­ley's an­nounce­ment at an in­vest­ment sum­mit in New Delhi that the bank­ruptcy and in­sol­vency Bill could be passed in the forth­com­ing bud­get ses­sion of Par­lia­ment. The joint com­mit­tee that is ex­am­in­ing the de­tails of the Bill is ex­pected to sub­mit its re­port by the first week of March. Be­fore this two-day rally, on 4 Fe­bru­ary, 12 of the 39 listed bank stocks-in­clud­ing State Bank of In­dia, the na­tion's largest len­der, and ICICI Bank Ltd, the largest pri­vate bank-hit their 12-month low. A day be­fore, on 3 Fe­bru­ary, five other banks, in­clud­ing Bank of Bar­oda, tested their low­est level in a year. Of th­ese 17 banks, 13 are govern­ment-owned, and for two-United Bank of In­dia and Pun­jab and Sind Bank-the stock prices dropped to their his­toric low.

Two-thirds of the listed banks, or 26 out of 39, traded at least at half the prices of their his­toric highs last week. One of them, Dhan­laxmi Bank Ltd, has shed at least 91% value from its peak, recorded in Oc­to­ber 2010. For five other banks, all in the pub­lic sec­tor (In­dian Over­seas Bank, United Bank of In­dia, Bank of In­dia, Ori­en­tal Bank of Com­merce and Al­la­habad Bank), the value de­struc­tion is be­tween 81% and 90% from their peak in 2010 (bar­ring In­dian Over­seas Bank, which recorded its his­toric high in 2008). Sim­i­larly, Ca­nara Bank, UCO Bank, Pun­jab and Sind Bank, Dena Bank and Cor­po­ra­tion Bank have seen be­tween 75% and 80% value ero­sion, from their 2010 price level.

Only three pri­vate banks-Dhan­laxmi Bank, Jammu and Kash­mir Bank Ltd and Kar­nataka Bank Ltd-fea­ture in the list of 26 that have seen at least 60% value ero­sion from their peak. The State Bank of In­dia's value ero­sion, from its peak, has been close to 53%, and that of ICICI Bank, a lit­tle over 48%. The stock of HDFC Bank Ltd has seen the least ero­sion of value from its his­toric high, at around 7.5%, and In­dusInd Bank Ltd, 8.3%. Ko­tak Mahin­dra Bank Ltd has shed 10.5% and Yes Bank Ltd 14.5% from their his­toric highs.

So, where do th­ese bank stocks stand now in terms of val­u­a­tion? Go­ing by the price-to­book ra­tio, a pop­u­lar val­u­a­tion met­ric, Ko­tak Mahin­dra Bank is trad­ing at 4.8 times its book and HDFC Bank, around 4.2 times. Both fea­ture in the list of most ex­pen­sive bank stocks, glob­ally. The only other bank stock that is trad­ing above three times its book is In­dusInd Bank. Yes Bank and Axis Bank Ltd are trad­ing more than two times their books, and ICICI Bank, around 1.5 times. All pub­lic sec­tor banks are trad­ing less than one time their book value, led by State Bank of In­dia at 0.72 time. Bank of Bar­oda is the next most val­ued bank in this pack, trad­ing at 0.67 time its book. At least five state-run banks' mar­ket value is less than a quar­ter per cent of their book value. They are In­dian Over­seas Bank, Bank of In­dia, Ori­en­tal Bank of Com­merce, Al­la­habad Bank and Pun­jab and Sind Bank.

The big­gest con­cern of the in­vest­ing com­mu­nity is the qual­ity of as­sets of In­dian banks. Many of them feel that the de­clared non-per­form­ing as­sets or the NPAs on which the banks do not earn any in­ter­est and for which they need to set aside money are an ice­berg with a large part of it un­der wa­ter and not vis­i­ble. Till now, most pub­lic sec­tor banks have been re­veal­ing their NPAs at their con­ve­nience. For in­stance, higher trea­sury in­come in a par­tic­u­lar quar­ter en­cour­ages a bank to re­veal cer­tain ac­counts that have turned into NPAs as it has the cush­ion to post a mod­est net profit even af­ter pro­vid­ing for it. How­ever, in the next quar­ter, the same bank may not re­veal more-even if the NPAs have grown by this time-if it does not have enough in­come to pro­vide for it. Most banks do not want to dis­ap­point in­vestors by an­nounc­ing a loss or even a sharp drop in net profit, but now they will be com­pelled to do so as the RBI wants them to clean up their books by March 2017. For quite a few of them, the money re­quired to make a full pro­vi­sion for NPAs may wipe out a large por­tion of their equity and re­serves.

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