New measures positive for public sector bank stocks
But implementation of rule will be gradual and remains a key monitorable
Stocks of most public sector banks declined between one and five per cent on Friday, when the government announced long-awaited measures to resolve the huge bad loans menace in the sector. The Stocks of a few corporate-facing private banks also fell.
Part of this weakness can be attributed to the strong surge witnessed by these stocks in recent times in anticipation of concrete measures to solve the bad loans issue. Lack of clarity around further action by the Reserve Bank of India (RBI) as well as quantum of haircuts required to be taken by the banks, while selling or liquidating the bad loans, were other factors that pulled down the banking stocks on Friday's session.
Nevertheless, it is a step in the right direction. As bankers were sceptical to take any decisions, the new measures pass the baton to the RBI, which will now have more powers and is expected to deal with the issue firmly. Mahesh Patil, co-chief investment officer (equities), Birla Sunlife Asset Management, said, “Banks will have to take haircuts and weaker PSU banks will see a hit on their balance sheets. But if resolutions happen, then at least after taking the haircut, banks won’t have to make further provisions. That is a positive, if it is implemented.”
There are, however, questions, too, which pertain to the pace of bad loan resolution, among others. Siddharth Purohit, banking analyst at Angel Broking, said, an overhang on banking stocks will be the excess provisioning required for deep haircuts. But there are advantages as well. “Certain grey areas need to be addressed, such as whether the RBI will be part of commercial decision-making and are banks in a state of health to take deep haircuts?” If the lenders are not, will the onus of recognising the haircut taken be reflected on the bank’s balance sheet or will the RBI provide some cushion in absorbing the excess stress, he said.
The measures, however, indicate the strong intention of the government and the RBI to solve the bad loans mess. From here on, incremental news flow around resolution will drive performance of public sector banks and should restrict significant downside for the stocks.