The gross non-performing assets (NPAs), or doubtful loans, of public sector banks (PSBs) rose to 5.17 percent of their advances by December 2013, against 4.18 per cent a year before due the slowdown seen in the domestic economy. However, the growth in restructured assets seems to be stabilising, according to the latest Union finance ministry data. As of December-end, stressed assets, the sum of gross NPAs and restructured advances, was 12.61 percent of gross advances, compared to 11.02 percent at end-March 2013.Asset quality of banks continues to deteriorate as high amount of NPAs are seen in large corporates. However, there has been a reduction in NPAs in the real estate sector. Speaking to CNBC-TV18's Latha Venkatesh and Sonia Shenoy, VR Iyer, CMD of Bank of India said the improvement in infrastructure sector can been seen only after the general elections. She stated that the near-term outlook on asset quality is not very bright and margins are expected to remain under pressure. “The micro, small and medium enterprises (MSMEs) sector may come under stress if growth does not improve,” she said. However, she sees improvement in the banking sector if a stable government comes in power. “The RBI is likely to maintain rates going forward,” she said. Banking analyst Rajiv Mehta of India Infoline sees stable outlook for retail-oriented private banks. He says asset quality risks are higher for corporate lenders like ICICI Bank. He recommends investors to stick to retail-oriented banks like IndusInd Bank and ING Vysya Bank. “We see valuation recovery in banks such as Bank of India,” he told the channel. In NBFCs, he likes LIC Housing Finance and Bajaj Finance. On the other hand, Mehta urges investors to steer clear of vehicle financing companies.
Below is the edited transcript of the interview:
Latha: Any improvement in the prospects of infrastructure companies is only if there is certainty in governance after the elections that at the moment it is more a story of hope. What is your sense of non-performing loans (NPLs) from the infrastructure space? Will we continue to see more of them and things will change only and after a majority government or a stable government is in place?Iyer: As of now, of course we are not seeing much NPLs in the infrastructure space. No doubt, a few of them are heavily strained on the cash flows and are trying to deleverage themselves while trying to get over their current stress that they are experiencing but I firmly believe that anything we can imagine to improve is only after election results are announced because you would appreciate that there is hardly any announcement of new infrastructure being made with the current government, they are not in a position to do as of now also and going forward of course there will be more market volatility at least for the next six months because of the political developments.
So, only going forward thereafter, one can expect but again infrastructure is a long-term gain. By the time they will settle down, it will be quite a while before they can start generating cash flows. Therefore, for a year or so, the near-term outlook is not very bright.Sonia: How do you approach stocks in that case because if you look at private banks post rally are now trading at about 8-10 percent premium to their five year averages but the state owned banks are still at a 35-40 percent discount. So, how to you approach the two pockets now?Mehta: Private banks and public banks are facing a different outlook. Private banks, we categorize them into two kinds of banks - one is more retail oriented private bank like HDFC Bank and IndusInd Bank where we see a more stable outlook at this point in time and then there are slightly higher risk banks like ICICI Bank, Axis Bank and Yes Bank, which are largely corporate lenders wherein we think that the asset quality risks are slightly higher. Across public sector undertakings (PSU) banks, there are more structural issues of capitalization, which can constrain their balancesheet growth and expand the risk of asset quality because of the higher net NPLs or networth ratio with them.
_PAGEBREAK_So, we are approaching all the three segments differently wherein we would still want to recommend and be with more retail oriented banks and there we prefer IndusInd Bank and ING Vysya Bank.
Among the corporate lenders on the private side, we like Axis Bank at this point in time and we see a further cyclical recovery in valuations in the near-term there. Amongst the PSU banks, we think that in near-term further price upsides in case of larger PSU banks could be limited given the fact that they have outperformed within the PSU space. But, I do see valuation catch up or valuation recovery happening in some of the relatively smaller size PSU banks like Bank of India (BoI), Oriental Bank of Commerce (OBC) and Indian Bank.Latha: What is your general comment on the NPL quantum therefore, we only discussed infrastructure but as a whole, would you say that the system is going to see more NPLs for next one year as you say, till a new government settles in?Iyer: It is a mixed bag for different banks but banks are generally under pressure for the asset quality and also under pressure for the margins. So, going forward since there has not been much change in the macro economic fundamentals, we have not seen any change. In fact there is no surge in activity during January, February also. The eight main core industries have also underperformed, just at 1.6 percent growth. So, looking at all these things of course there is going to be pressure on the asset quality.
Of course it all depends upon how quickly the newly elected government settles down and comes out with the policy reforms. I always firmly believe that every government can deliver. What is now required is for some determined efforts at the implementations, sorting out the governance issues. So, I believe that maybe post July-August we should see better days and things should definitely improve and that should bring about some sort of a relief for all the bankers on the asset quality.Latha: So would you say that if we had an NDA government seriously short of that 275 mark or in some form not terribly stable government, we are in for really bad times?Iyer: No, I won’t tell that of course, I am not very good in politics but any government that comes in the power would have by now realized what is required for the economy going forward. So, I am very confident that the government which comes into power would definitely pan out better and bring about the required reforms.Sonia: Just to get a sense of how Bank of India’s asset quality situation could progress from here. You said things might improve a tad bit going ahead. So, from this 2.8 percent gross non performing assets (NPAs) you are sitting at, what could the trajectory be going ahead and also you added quite a bit of stress assets in a quarter gone by, almost Rs 3000 crore. Do you see the same situation panning out or do you think things could get better?Iyer: If you would have seen our quarterly figures right from March 2013, we have steadily been able to bring down our gross NPA and net NPA as a percentage of the advances and we will certainly be able to do that going forward also. We will be able to contain NPAs and steadily bring it down. Latha: If the government goes through instability and growth continues at 4.5 percent for a couple of more quarters, do you think even you will be able to manage the possible NPLs say in Non-bank financial companies (NBFCs) that have lend to see construction equipment (CE) and commercial vehicles (CV) sectors or in the CV companies themselves or NPLs in the whole host of Micro, Small and Medium Enterprises (MSME), small and medium sized enterprises (SMEs). Can you oblige if gross domestic product (GDP) stays at 4.5 percent?Iyer: Today the most affected segment is the medium sector and also the SME sector. So, for another two or three quarter, the going is going to be what we are witnessing now. Maybe we will see some stress on these SME sectors and some of the medium sectors. But, otherwise overall, by and large for Bank of India we should be able to contain that, we should be able to maintain where we are for the next two quarters.
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