Only sweeping structural change can lift PSBs: Religare Cap

Parag Jariwala of Religare Capital Markets gives his views on the banking sector post reforms announcment.Below is the transcript of Parag Jariwala’s interview with Sumaira Abidi & Reema Tendulkar on CNBC-TV18.Reema: The big mover today is Bank of Baroda (BOB) it has gained closed to about 13-14 percent. With PS Jayakumar on board with his Citi experience and 53 years of age do you think it is going to be a game changer for Bank of Baroda? Have you changed the view on the bank or are you likely to do so?A: I have not changed my view on the bank. I agree to a point that four out of five managing directors (MDs) are having a public sector units (PSU) banks background. Canara Bank with Rakesh Sharma on the board with 33 years from State Bank of India (SBI) and only one year from very small private sector bank ultimately he is a PSU cadre. Only one good appointment to my mind is the Bank of Baroda.I am very excited to see how the things move out because this is a first time when we see a private sector MD taking over as a PSU bank MD. Given that still we have to see lot of things as it moves out. The entire sector is going through a lot of pain in terms of non-performing assets (NPAs), in terms of loan growth in terms of margins.So, even if you have a good managing directors these are the things which comes from the top and these are the sectoral headwinds. After today’s run-up the stock trades at around 1 times price to book. I don’t think that return on equities (ROEs) are going to be any materially different at least for next two or three years. So at this point in time I still remain slightly negative on the stock. We have a hold rating and we continue to maintain that. Sumaira: In that case am I too hopeful in asking you whether any other stock could see a re-rating post this?A: This plan is compilation of the announcement done by government over a past three to four months. I don’t see anything new in the overall scheme of thing. Capital was already announced earlier, Bank Board Bureau will get operational from April 1st, 2016. It is a structural problem. I mean nobody from the private sector wants to lose out the hefty pay packages which are into millions and take very challenging role of PSU.It is not only about money it is also about the processes, it is also about the culture; it is also about the people who are employed. One man cannot change 10,000 employees, it is very difficult. So until and unless you see change in terms of broad based structural reforms across the organisation, it is difficult to conclude that things will change in a very drastic manner.Reema: Basically you don\\'t see this as a game changer for the PSU banks. Asset quality is the key near term stress and the new revamp plan as not done much to elevate the stress of the banking space. How do you read the announcements on NPAs and therefore how do you expect the NPAs for PSU banks to pan out?A: There was no announcement at all so far NPAs are concerned. It was only a general statement that policy reforms will be quick and responsive. So all these things we already know. So just to take an example, the six state electricity boards (SEBs) got restructured in September 2012 and the moratorium is getting over in the next month. So we were hopeful that there will be some announcement as regards to how they are going to do something about SEBs because around Rs 50,000-60,000 crore loans are not addressed then I think we will see NPA in next one month. So there was no announcement on SEB side, there was no announcement on how to tackle the high leverage problem or how to tackle some of the power projects which are not getting power purchase agreement (PPA) side. So all these problems requires a lot of inter-ministerial discussion etc.Sumaira: What about the formation of the Bank Bureau Board (BBB)? Do you see a lot more consolidation, mergers in this space because of this, could it get a leg up or even it is not just that the appointments in future, could they be at least a big positive for the banking sector in the long-term?A: I agree. BBB will definitely have some speed in terms of appointments for MDs or even Executive Directors (EDs) etc, that point is well taken. Again if the MD is getting appointed from the same lot, nothing is going to change. It is only that we will see some faster implementation from the side of the government. That is there but there may be some mid-level appointments from private sector. I don’t know how that will fit in the overall scheme of things because if you have the general manager credit at Rs 15-16 lakh and you bring somebody from outside with Rs 50 lakh or Rs 1 crore of package, I don’t know how other employees of the PSU will take that in what spirit. So it is very challenging to, on an operational basis, implement all these things. Secondly on terms of consolidation, we have lot of example in the past, look at Kotak Bank, with a kind of bank Uday Kotak is running, he is also finding it challenging to merge ING Vysya Bank which is again a private sector bank. So if you merge two PSU banks, lot of energy, time, manpower is used to merge the bank. This time I think more energy and time is required to tackle the NPA problems. So I don’t think that is going to change anything or I don’t even see merger and acquisition a near-term possibility.