‘Banks show­ing pos­i­tive signs but fun­da­men­tals still weak’

The Hitavada - - BUSINESS - ■ By Gur­dip Singh

NOT­WITH­STAND­ING the pos­i­tive signs in the In­dian bank­ing sec­tor, fun­da­men­tals still re­main a long way from re­turn­ing to “healthy level”, a DBS re­port said on Fri­day. Ac­cord­ing to the global fi­nan­cial ser­vices ma­jor, the re­cent sec­ond quar­ter earn­ings of In­dian banks showed some pos­i­tive signs with a slight im­prove­ment in as­set qual­ity.

Over­all, most banks showed a re­duc­tion in gross non-per­form­ing loans (NPLs) and lower for­ma­tion of new NPLs. Some banks also ex­pect fur­ther im­prove­ment in as­set qual­ity in the com­ing quar­ters, noted the re­port.

Lower credit costs also helped the bot­tom line of the banks, as the coun­tries two lead­ing lenders -- State Bank of In­dia and ICICI Bank -- re­turned to profit in the Septem­ber quar­ter af­ter re­port­ing losses in the prior quar­ter.

“Gross NPL ra­tio of our sam­ple re­mains above 10 per cent while cap­i­tal­i­sa­tion re­mains just about ad­e­quate ( Tier I ra­tio of 910 per cent),” DBS said in a re­search note adding, the Gov­ern­ment is ex­pected to main­tain cap­i­tal lev­els of banks through pe­ri­odic eq­uity in­jec­tion. The re­port fur­ther noted that as­set qual­ity is­sues are un­likely to be re­solved with­out “ex­cep­tional mea­sures”, and hence will re­main a long-term is­sue. DBS how­ever cau­tioned that the re­cent im­prove­ments seen could slow down as re­cov­er­ies from on­go­ing bank­ruptcy res­o­lu­tions get more chal­leng­ing once the bet­ter qual­ity as­sets are sold. Val­u­a­tions of In­dian bank USD bonds re­main rel­a­tively ex­pen­sive and do not of­fer much up­side from cur­rent lev­els.

Hence, bonds have not re­acted to the sec­ond quar­ter re­sults un­like eq­ui­ties of the banks which have seen a rally. “That said, bond val­u­a­tions are driven by Govt own­er­ship and sup­ported by the strong tech­ni­cals (ab­sence of new bond sup­ply). At best, In­dian bank bonds are suit­able for buy and hold in­vestors for coupon carry,” the re­port said.

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