We are reproducing article written by well-known Uma Shashikant in TOI:
There is a common disease among investors. They love to cast themselves in the same mould as Warren Buffet. They are forever asking if there is a bargain in buying stocks that have been hammered down. This tactic is not very different from buying in a bull market, hoping to find a bigger fool who will pay more. In bear markets, investors feel prices have fallen so much that they have to go up. Those afflicted by this disease are now eyeing PSU bank stocks. Let me ask them to think before they jump in.
Banking business is about raising deposits and making loans and PSU banks have made a mess of the quality of their loans.Their CORE product has turned out to be defective. PROFITS thus are under strain andmore efficient competition is running away with market shares. It is difficult to see where the fundamental merit lies in picking up PSU Bank stocks.
Some investors will point to future growth potential. History is usually the rear-view mirror. Upto 2007, competition from young private sector banks was not as tough. Raising capital and expanding the business is likely to be VERY TOUGH for PSU banks this time.
A period of Losses, high provisioning and high NPAs leaves the balanace sheet of a bank very very weak.Reserves are depleted adn without capital, a bank cannot expand loans.Assume a bank balance sheet of Rs 100, funded by Rs 12 of equity and Rs 88 of deposits. This is a capital adequacy of 12% and a leverage of 8.3 times(110/12). This
means that every rupee of bank’s capital has an impact of 8.3 times on assets. The drop is value of assets as capital is eroded by losses, and provisioning is steep due to leverage. When assets go bad, capital needed to bring the balance sheet back to health becomes higher. The Rs 70000crore capital infusion against Rs 3,00,000 crore of bad loans is sadly inadequate
Research shows that expansion of bank credit might be significantly impacted by business risk as perceived by banks, low borrowing capability and lack of credit demand in a weak economy. If large borrowers, who account for over 60% of the stressed assets of Indian banks, remain poor quality borrowers with low investment, reenues and
profits, both banks and the govt will find credit, investment and economic expansion to be an uphill task. It would be simplistic to believe that capital infusion into PSU banks will translate into growing advances on their books
What about valuations? The very attractive price to book ratio of banks is workedout based on reported capital and reserves. The problem in the Indian banking system today is the unreliable asset valuation, perpetuated by the debt restructuring models of 2009. As RBI dismantles these ingenious classifications and asks banks to provide
for bad loans and restructure standard loans that have become stressed assets, the erosion in the value of assets is STEEPER than what the books show. Investors can simply rework the price to book value of their favourite bank stock by reducing the net worth by the total stressed assets. The result can be QUITE REAL AND SHOCKING
What remains is the argument that in the long run, PSU banking stocks will have to turn around. The competitive environment is gnawing at this assumption. Payment banks are likely to use technology and mobile networds to reach more deposits and tap low-cost deposits that were the mainstay of PSU Banks. In the process, they may render the physical branch networks redundant. Profitable private sector banks will invest in technology and IT infrastructure to lower the cost of operations and price themselves even more competitively. Long-term benefits to the banking sector seem to be skewed in favour of newer private players, not their PSU counterparts
(The author is Chairperson, Centre for Investment Education and Learning)
1. Only BoB has made entire provisioning (as required by RBI guidelines) in Q3. All other Public sector banks have made only 50% provisioning in Q3 and balance 50% to be made in Q4. And
many banks have hidden their actual losses through accounting jugglery/write backs (Bank of India). Such write backs may not be available in Q4 and
hence, Q4 MAY WITNESS EVEN HIGHER LOSSES
2. Govt had infused capital in last 2 years in several banks like IDBI, Bank of Maharashtra, IOB, Indian Bank. Did such capital infusion result in better working. Answer is clear NO. Rather, working has worsened (strong politician-businessmen nexus)
3. Cost to Income in public sector banks is very very high (viz-a-viz private sector banks). It means PSU banks likely to remain at disadvantage
4. Finally, with entry of Private sector companies in any field/industry, PSUs have suffered immensely and in many cases, irrepairably. Once upon a time BSNL was the most profitable telecom co with reserves of Rs 40,000 crores. Now, BSNL incurs huge losses year after year. Same with MTNL where yearly losses are more than yearly revenue. Take the case of AIR INDIA. Despite huge capital infusion by govt, AIR INDIA continues to teeter on brink of huge huge losses, market share continues to be lower. On the other hand, private sector airlines like Jet has become no 1 brand in domestic airlines industry. Market share of private sector airlines (which entered this field several decades after birth of AIR INDIA) continues to rise, losses (upto last year) were miniscule compared to huge losses of AIR INDIA and now, private sector airlines now reporting excellent profits whereas AIR INDIA still struggling with losses.
Similarly, in Indian banking industry, private sector banks are already posing toughest challenge/competition to PSU banks in terms of technology,better service, efficiency, competitive offerings, LOW COST TO REVENUE. Private sector banks (HDFC, Yes Bank, Axis Bank) have raised huge sums through QIP last year whereas not a single PSU bank could raise money through similar exercise.Hence, regaining old glory of huge profits by PSU banks appears a far cry
5. Finally, 10 BIGGEST accounts (various industrial houses in the field infra, steel, metal, commodities, real estate) have exposure of nearly 5 lac crores are under stress. If it is not far-fetched that in coming quarters, some of these may become NPAs which can deal a big blow to revival of PSU banks.
6. Yesterday’s rise in share prices of PSU banks was more due to short covering than fundamentals. And shares which had fallen steepest rose the most. Now, short covering appears to be over, hence, stock prices of PSU banks should cool down.