IIFL disappointed with Union Bank, Oriental Bank Q2 results

29189 Investors following PNB. Share this News with them.

0

Like this story, share it with millions of investors on M3

IIFL disappointed with Union Bank, Oriental Bank Q2 results

Public sector banks have been a put-off this earnings season, with Union Bank and Oriental Bank of Commerce disappointing the most, says Sampath Kumar, senior research analyst at IIFL Institutional Equities.

Post your opinion here

 

0

Tweet

Share on Tumblr

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ News and Notices about PNB See interviews with PNB Management See what other Experts & Brokerages are saying about PNB See previous Results of PNB

Public sector banks have been a put-off this earnings season, with Union Bank and Oriental Bank of Commerce disappointing the most, says Sampath Kumar, senior research analyst at IIFL Institutional Equities. "The issue that the market focused on this quarter was asset quality. We know that PSU banks will be migrating to system-based NPL recognition this quarter, but the trend that has come out is very mixed," he explained.

Going forward, he sees the savings bank interest rates deregulation posing a problem for the larger banks.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Let me start with Punjab National Bank  where reactions have been mixed. Yesterday it was up, today it is down on asset quality concerns. What did you take away finally?

A: I think the key take away is asset quality only; I think that is going to be the dominating issue for the outlook of PNB. I think the headline numbers looked very good when the results came, including the non-performing loan (NPL) numbers and the stock price went up on the back of that. But subsequently, when we discovered that there was a very large amount of restructured loans, it actually put the issue of asset quality in the forefront once again. You are seeing the stock reaction today to that.

PNB has always had very high levels of restructured loans. We saw a very large addition in the second quarter and we are likely to see more of this for the entire sector and also for PNB which means that the concern on PNB will be much more than others. To me, it looks like at least for the next 3-6 months this is something which is going to weigh on the stock price. It is difficult to see how PNB can outperform from here.

Q: We had a couple of disappointments from the PSU banking space. Which to your mind was the most disappointing set of numbers we have seen from the PSU lot so far?

A: I will say Union Bank. If I look at the larger banks Union Bank was the most disappointing, followed by PNB. Among the midcap names, I would say Oriental Bank of Commerce was disappointing. The issue that the market was focusing on this quarter was all about asset quality. We know that PSU banks will be migrating to system-based NPL recognition this quarter, but the trend that has come out is very-very mixed. We had negative surprises on the asset quality, but the quantum of number that came out took market by surprise.

However, in some other places it hasn't happened as much as people would have thought. It is difficult to make out what is happening here actually. In general I would imagine that when you are introducing system based NPL recognition for loans below Rs 10 lakh, it is likely that it will throw up a lot of numbers but the trend that has come out so far is very mixed. We still have Bank of India which is another larger bank to come out with their results. So we will have to wait and see how that impacts

Q: What about State Bank of India ? What do you expect for the next few quarters?

A: State Bank of India does not have the issue of system based NPL recognition, at least that is our understanding as of now. I think State Bank has been facing an asset quality issue for sometime and I don't think people are expecting any better number than what we saw in the first quarter; maybe slightly better number but not too much from there. If I recall they added about Rs 6,100 crore of NPL in the first quarter may not be as high in the second quarter but I think it should be around Rs 5500 crore or thereabouts for the next 2-3 quarters. If that is a number that is going to come through it will not be a negative surprise for the market. I don't see a reason for SBI to disappoint, but again we have to wait and watch.

In terms of profit, I would say that this quarter we should expect a Rs 2,400 crore profit because we know that SBI still has to make another Rs 150 crore of addition of provision as far as the RBI mandate, so that is going to weigh on. If from third quarter onwards that number should look up, their profit number should also look up, should come closer to Rs 3,000 crore.

Q: How material do you think this saving rates issue is going to be for the banks and how do you expect some of the bigger guys to move because they haven't yet?

A: Saving deposit deregulation at least in the short term in our opinion is going to be negative for banks from a margin point of view. If margins are going to be negative impact so will earnings be. The reason why we say that is when deregulation happens rates will move. In the current environment, rates are more likely to move up than move down.

Given the fact that some of the smaller private sector banks have hiked rates very aggressively, we should expect the larger banks to raise their deposit rates by 50-100 basis points. 50 basis points is something which the banks can manage because there will be a corresponding increase in lending rates as well. But if it is going to be 100 basis points, I don't think banks at least in the short term can make up this higher impact on cost. So that will leave some negative impact of earnings outlook at least in the short term.

We will have to see how banks can make it up over the medium term through a combination of fees and lending rates increases. I think well run banks will manage the situation well over a period of time, but the banks which are not very well managed will continue to face issues on this.