Banks have reacted in very different way to their results this quarter. In an interview to CNBC-TV18, Hemindra Hazari, head-equity research of Nirmal Bang Institutional Equities says, it's likely that banks earnings will start decelerating.
Banks have reacted in very different way to their results this quarter. In an interview to CNBC-TV18, Hemindra Hazari, head-equity research of Nirmal Bang Institutional Equities says, it's likely that banks earnings will start decelerating. "The actual cost of asset quality is not being factored in Q4. It is very evident that a lot of the CDR loans will actually fructify from the first and second of this year onwards,” adds.
Below is the edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.
Q: The markets reacted quite negatively to some of the PSU bank numbers like Syndicate Bank or Bank of Baroda, where you disappointed as well?
A: If you look at both these banks, it’s very interesting. Syndicate Bank, on the face of it, very clearly disappointed. But if you actually go and take a closer examination of the numbers, you will find in my opinion that the new management has actually suppressed the profits because there have been certain charges which they have taken this quarter, which in my opinion were unwarranted. Therefore, I think we should see very good set of numbers, which the new management can credit of in the following quarters.
In banks, it’s very easy to inflate and suppress numbers. It is the analysts’ job to point these things out. So, I remain quite positive on Syndicate Bank. On the face of it, the numbers were disappointing but there were lot of charges, which he has put in which were really required in the coming quarters.
Bank of Baroda, the numbers were disappointing because it looks like their growth is decelerating. You are seeing pressure on earnings coming in. There has been a tax write back which really boosted net profits as really was also the case with Syndicate Bank in the fourth quarter. I don’t think the market did like that very much. So, if you look at both these numbers, I think Bank of Baroda clearly was more disappointing than Syndicate Bank.
Q: From the block of PSU numbers, you have seen so far, which ones would you say look the strongest or the most solid this quarter?
A: If you look at the sector as a whole, by and large you are seeing net profit growth, you are seeing operating profit growth and at the same time one is hearing stories all the time of large corporate distress. These things really don’t go together because if this was really the case then the banks in India have achieved a highly commendable performance. They have decoupled themselves from the broader economy, which to my mind does not make much sense.
In my view, the kind of profit earnings that you are seeing today in the banking sector are by and large being inflated because the actual cost of asset quality is not being factored in Q4, which was expected, in the sense the kind of corporate debt restructuring schemes (CDR) proposals that were going in. So, it is very evident to me atleast that a lot of the CDR loans will actually fructify from the first and second of this year onwards. Therefore, it’s likely that banks earnings will start decelerating.
Q: Are you seeing any signs of the situation troughing out for individual banks? Bank of India, for instance, has had a tough couple of quarters but this time around it looked pretty solid in terms of its performance.
A: There have been some large banks, which have positively surprised, like Bank of India. But again, I have a broader voice of caution here because I expect corporate distress to continue. Most of our large banks even in the private banking space have very large exposures to corporate India, which are in distress and which in my opinion are going to get worse. So, all these banks both public as well as private are going to get impacted in the future quarters.
Q: When will this stress start showing up, which you are alluding to, which has been deferred? Would it affect all banks, PSU and private in your eyes?
A: I had expected the stress to show in the fourth quarter. But if you see the bank balance sheets, you are not seeing a significant increase even in the restructured standard book. This was surprising, given the publicity given to number of corproates that had approached the CDR cell. That only goes to show a lot of the CDR proposals are not being cleared by the CDR cell and still today, they are showing as standard assets on bank balance sheet. So, I would expect it to come-in, in the first quarter, second quarter of this year. That is why I would think there is more pain coming for banks. You are not seeing that on the P&L side of banks.