Banks' NPA woes to continue; prefer HDFC, Kotak Bk: Hazari

The RBI met with India’s top bankers to discuss asset quality concerns and the way forward for improving the quality of balance sheets or outline steps that would help banks clean up their balance sheets by March 2017. The RBI also asked banks to recognize more restructured assets as bad assets in following quarters. So, banks may have to see additional provisioning in the coming quarters.Discussing this issue with CNBC-TV18’s Sonia Shenoy and Anuj Singhal, banking expert, Hemindra Hazari says that largecap banks both in the public and private space that have corporate exposure will be hugely impacted. The asset quality issues have not yet plateaued-out for the sector and worst days are yet to come, he addsRBI says once the bankruptcy code comes in the issues may get resolved but Hazari doubts that because in our country until stringent action is taken nothing happens.     “If each of the huge groups which have exposure close to Rs 60,000 crore to banking industry – if they are to be classified as NPAs then all these banks will have severe problem. So bankers will be reluctant to identify these accounts as NPAs,” says Hazari.In terms of pecking order, he recommends avoiding the entire financial intermediary space because there is still lot of pain to come but if institutional investors have to be in the space then one should look at HDFC Bank and Kotak Mahindra Bank because they are relatively better but all of them are going to get impacted for sure, says Hazari.From the PSU banking space he would look for the medium-sized one Syndicate Bank, which has less exposure to private sector power generators.Bank of Baroda is also better off but in the last few years it has increased is foreign asset portfolio, so there could be some more pain from that segment.Below is the transcript of Hemindra Hazari’s interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal. Sonia: The Reserve Bank of India (RBI) has asked banks to recognise more restructure assets as bad assets in the quarters to come. So, in effect banks will have to see additional provisioning. How will you read into that news flow and which are the banks you think could get impacted the most? A: All the large banks in this country both in the government space as well as in the private space are going to get hugely impacted because even these 150 companies which RBIs wants the banks to recognise I don't think it includes some of the very large leverage corporate groups where each of their individual exposure to the banking industry would be Rs 30,000 crore at a minimum. If all these accounts are to be classified as Non-performing assets (NPA) there is going to be a huge dent to the banking industry. So, it is to be expected and I have been saying this for some time that the asset quality issues have not plateaued out at all for the banking sector and are going to see far more worse days to come. Anuj: So, which ones are most vulnerable. We have seen sort of big correction in Punjab National Bank (PNB), we have seen some bit of volatility in names like State Bank of India (SBI) and Bank of Baroda (BoB). Out of the large cap ones which are the ones, Bank of India (BOI) as well has been quite volatile, which one do you think is most vulnerable? A: All of them, all the large banks, even some of the large new private sector banks which have corporate exposures are going to get impacted and that means all the big names who have given extensive loans to the corporate sectors specially for infrastructure. The RBI is saying that once the bankruptcy court comes in the issues may get resolved but in our country as we all know until stringent action is taken nothing ever comes back. So, until some of these industrials have been caught and probably put to jail then only can we see some recovery in bad assets coming in but until then there will be all talk and no action. Sonia: Let us talk about some of the private sector banks because over there the crack has been extremely pronounced, especially in a name like ICICI Bank and we know the exposure that ICICI Bank has to some of these stressed assets like JP Associates, GMR, Suzlon etc. But how do the valuations stack up now because ICICI is trading at sub two times forward price to book which is cheap compared to its historic valuations. Do you think it still needs to price in some more of the bad news or the worst is already in the price?

A: When you say it is cheap compared to the past what is the past. I don't think the Indian banking industry has ever seen such a huge credit expansion taking place and that too towards an infrastructure sector where much of the power projects are in the doldrums. So, here I don't think the relevance to the past maybe that relevant. And that is the whole problem. If each of these business groups which have exposure of about Rs 60,000 crore to the banking industry if they are to be classified as NPA then all these banks are going to have severe problems. Therefore you find there is a great deal of reluctance on the part of bankers and very naturally so to identify these accounts as NPA because if that were to happen the Indian banking industry would not look good at all and would reflect even on the RBI. So, naturally everyone would like to talk about it but I don't think anybody really wants to reveal it because if it is revealed the picture can be very frightening.

Anuj: We have seen ICICI Bank continuously hit 52 week low. So, we have seen that with Axis Bank as well. HDFC Bank and Kotak Mahindra Bank have been relative outperformers. What would be your pecking order if at all you would want to buy any banking names?

A: According to me one should avoid the entire financial intermediary space because as I said there is a lot of pain still to come. But like a lot of institutional investors you have to be in this space because of the very high weightages that the finance space has then I would say that yes, HDFC Bank and Kotak Mahindra Bank are relatively better off than others. All of them are going to get impacted because all of them have some form of corporate exposure as well but yes, those two are the names which one has to be in this space then that will be the safe havens to be in.

Sonia: You mentioned the private sector banks and what could be the relative outperformers there but within Public Sector undertakings (PSU)?