Sampath Kumar, Banking Analyst, Institutional Equities, IIFL who prefers retail-oriented banks over wholesale-funded banks, feels that the multiples of private banks should come down further. Among private sector lenders, IndusInd Bank is better placed than YES Bank, he added.
Reserve Bank of India's (RBI) measure to rescue bonds will trigger some rally in banking stocks in the near-term, but it is tough to buy bank stocks with a long-term view, says Sampath Kumar, Banking Analyst, Institutional Equities, IIFL.
“Public sector banks still have big fundamental concerns; the capitalisation issue for PSBs may not be resolved soon. I think RBI will have to focus on more long-term fundamental issues,” he told CNBC-TV18 in an interview.
The 10-bond yields hit a five-year high of 9.4 percent on Tuesday and clawed back to end the day way below 9 percent. RBI would purchase Rs 8,000 crore worth of bonds via open market operations on Thursday. The measures will restrict a sharp rise in long-term yields and reduce MTM losses on banks' investment portfolios.
Kumar who prefers retail-oriented banks over wholesale-funded banks, feels that the multiples of private banks should come down further. Among private sector lenders, IndusInd Bank is better placed than YES Bank, he added.
Below is the edited transcript of Kumar's interview to CNBC-TV18.
Q: How do you approach this banking rally in the light of what the Reserve Bank of India (RBI) did last night?
A: It is a short-term relief considering the fact that we have seen a lot of bad news on the currency and the rate front over the last two days. So, this rally probably will last for a little while. It is clear that banking stocks have been beaten down a lot more on the back of whatever we have seen.
However, if one steps back and sees, we still do have some issues on growth side, we do have issues on asset quality side. So, it is going to be difficult to buy from a long-term perspective the stocks still. I think we still have some downside here. Infact yesterday, we downgraded a bunch of private banks as well because now the NPLs and restructured loans have gotten to such larger proportions that we don't think even the private banks can stay away from that. So, we still have a larger risk on NPLs, on the public sector banks we have issues about capitalisation. It is quite a challenging period.
Q: So you don't think these public sector banks that were rallying by about 8-10 percent will sustain their rally given fundamental concerns?
A: I think so because what the stocks have reacted so far is due to a sharp increase in bond yields and if one has to account for mark-to-market (MTM) losses, it looks like some of the public sector banks profits would get wiped out but that is as far as mark to market losses are concerned.
One can recoup some of these as we go along and if one hopes that yields will fall a little more further from here. But what is not easy to resolve is the NPL issues and the capitalisation issues.
Q: Do you think the RBI is doing the right thing by juggling around its whole maturity policy depending on how the bond yields are moving allowing public sector banks to sometimes hide losses, sometimes to make profits? Should the central bank be worried about what mark-to-market losses for banks are on quarter to quarter basis?
A: Ideally speaking, regulated forbearances are not good for enforcing discipline on the banks. Markets clearly overlook such forbearances unless they are accompanied by some fundamental changes. But let’s also face the fact that the global financial crisis regulated forbearance has become the order of the day. It is not just India, but all over the world regulated forbearances being a big part of central banks actions.
Hence, in that context, RBI may not be too way off from what it has been doing but it still has to address the fundamental issues. So, without addressing fundamental issues, I don't think markets will take into cognisance too much of this regulated forbearances.
Q: Let me ask about private sector banks which are also rallying today, one, in terms of their sensitivity to any kind of mark to market losses and two, why you are getting pessimistic about some of the higher quality private sector names?
A: On the MTM losses, certainly private sector banks are little better placed. Some of the private banks might have the corporate bond portfolio little more than what other banks would have so they will get impacted to an extent. As far as MTM losses are concerned, unless one is saying that they are liquidating the assets today, there won't be a financial loss as such. There is an economic loss but it can be recouped over a period of time.
We are concerned looking at some distressed companies like Jaiprakash Associates, GMR Infrastructure, GVK Power & Infrastructure I think the longer we live with the problem the bigger the problems get actually. So, we need to do something either in terms of restructuring or some other form of changes there.
For the banks not to get impacted significantly there are large concentrated exposures for banks and some of the private sector banks particularly who have done infrastructure lending has those risks as well. So, if those issues don't get resolved then some of those problems would evolve on them as well.
Before the RBI’s July 15 action of RBI it looked like we could expect a recovery in the second half in terms of growth and FY15 perhaps is a better year but right now our macro outlook has changed. We think that second half is going to be no different compared to first half this year and next year also we are not expecting a significant uptick in growth which means that the corporate profitability will remain under stress for a longer period of time then we thought which means that more problems will get added and so we think that some of the private sector banks will not be immune to this now.
Q: Do you think there is a case as you are suggesting of a significant structural P/E derating given the environment that we are trading in today, given what growth is and banks are geared to economic growth quite directly and the kind of asset quality issues that you just alluded to? Do you think generally speaking private sector banks need to trade at a lower price to book?
A: Yes, if we have a larger risk on the book, the derating will happen. It has already happened and probably will continue for some more time. Let’s not forget that some of these banks have traded at book or below book when you go back to 2002-2003 periods for the same set of reasons. So, the problems may not be as large but it looks like we are getting closer to that period then what I believed about six months back in terms of problem assets. If one looks at the public sector banks today, NPL plus restructured is almost 10-12 percent of the total loans. Private sector banks with large infrastructure exposure already have about 3-5 percent of their loans either in NPL or restructured category and we can see that rising further from here.
Q: Where does that leave some of these smaller private banks like Yes Bank and Indus Ind Bank, they are the ones which outperform the most at the start of the year and a fall in the most again over the last few weeks?
A: Yes Bank and Indus Ind Bank are slightly different. Yes Bank is a corporate lender and Indus Ind Bank is more of a retail consumer oriented bank. In this environment, even the consumer-oriented banks are going to be slightly better placed than the wholesale lenders because in wholesale lenders, we are facing two problems. The first one is that corporate sector profitability is coming under stress so you there are more companies coming under problems.
The second issue is that the wholesale lending always involves some element of loan concentration risk. So, any one-two names going bad will actually make the balance sheet look bad. As opposed to retail, even if one expects a deterioration, it is at distributed portfolio, so one will not see a very large increase in NPLs.
At the same time, retail essential is a well-oiled machine in terms of credit administration whether it is repossession of assets, recovery and liquidation. So, the losses can be cut much more quickly there and you can take corrective actions much more quickly there. Hence, in that sense Indus Ind is much better placed than Yes Bank at the moment.