Parag Jariwala, vice president-institutional research, Religare Capital Markets says the next few quarters are likely to be painful for the public sector banks as restructuring options like strategic debt restructuring (SDR) and 5:25 are just postponing the fundamental issues for them.
Below is the edited transcript of Parag Jariwala’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: The first stock on our radar this morning is IDBI Bank. Just wanted to ask you whether you track that one because now it has hit a fresh high today and we do have comments coming in from Jayant Sinha where he did mentioned that IDBI stake sale process will be done as soon as possible. How would you approach that stock?
A: We don’t cover the name but the point is if IDBI Bank has to go Axis Bank way, I mean we all know that the 51 percent government holding norms doesn’t apply to IDBI Bank mainly because it was been set up under a separate regulations. So, if it happens then definitely good. However, the point is the overhang in terms of all the bad infrastructure exposure which the bank has taken will still remain. Even perhaps the journey would be slightly long in nature because you have to do so many things, you have to basically start with zero.
There are lots of employees which are still under public sector domain. You have to hire a fresh from the markets. Conversion into an Axis Bank kind of a model is a long haul.
Latha: Explain to us this huge rally that has been happening in the public sector banks? Look at for month of November, we are on the last day of November and the big gainers Oriental Bank of Commerce is up 16 percent this month. Punjab National Bank (PNB) is up almost 14 percent this month. Bank of Baroda (BOB) is 13.5 percent this month. What is going on here, these while the amount of incremental rise in non-performing loans (NPLs) is falling say for a Punjab National Bank it is still a very elevated level of bad assets. Would you buy into the distress now?
A: Not really, market is taking a kind of a look at the numbers in the sense that somewhere the stress asset formation will start falling now. However, I think we have, last may be three or four kind of time zone where the PSU banks have rallied 15-20-25 percent and once the results are announced or when the market realisations goes back to their earlier levels so that possibility is very high.
Secondly, lot of restructuring which is happening in the market, currently like 5:25 or strategy debt restructuring (SDR) route they are kind of postponing the problems to may be 18 months down the line, two-three years down the line. So, it is actually not in a great sense we can conclude that the situation is improving. Situation remains as bad as it was before. Marginally, it can improve, but it is still, I would say that next two-three quarters would be reasonably painful for all the PSU banks.Latha: Let me put it in their favour the facts that, the points that have been advanced by those who are probably buying these shares – 1) – while 5:25 is clearly postponing or kicking the can, SDR - strategic debt restructuring getting a new good prompter in is probably good.Now I think we can count about a half a dozen cases like Electrosteel Steels and now Monnet Ispaat, Jyoti Structures – we have heard enough number of names in that space. So the argument that was advanced is that they are getting more proactive aggressive. 2) You had those two rating agencies also saying that they are changing the outlook from negative to stable will all these cut ice and many of the big groups are apparently shaping up in Reliance Infrastructure in several others we heard asset sale and debt restructuring plans. These don’t convince you to buy any PSU bank at all?
A: The name you took Electrosteel Steels the way restructuring has happened there is as per the regulation the conversion of debt into equity should happen at fair value or face value whichever is higher. Now the regulation say it is higher not lower so your conversion has actually happen at Rs 10 with a market price at that time was Rs 3 or now currently it is Rs 4. So, let us assume a situation in 18 months if the banks are not able to find a promoter you have to take 70 percent hit on your equity portion.
Your debt portion will be immediate classified as an NPA. Now the kind of high credit cost or slippages you will be setting after 18 months would be very high because this was the case which got restructured once in April 2013 now again it getting refinance in the SDR. So, it is like you are ballooning the problems at a far later date and you are not recognising any of the provision on these names. So that actually worries me.
If they are able to find a buyer there is nothing like it but even if it comes he will come at a substantial haircut to the market price or even he will ask for may be 30-40 percent haircut on debt value also. So, that is the true value of these companies.
Sonia: I wanted to ask you specifically about Punjab National Bank because that has been one of the big gainers this month. It is up almost 15 percent and to be fair for PNB the gross NPAs and the slippages have actually been stable for the past two quarters. It hasn’t gotten incrementally worst. Out of the whole lot do you think PNB will perhaps outperform the rest of its peers purely because of the way its internals are shaping up?
A: I agree their last two quarters have been bad but then again you are comparing this last two quarter with the third last quarter which was like worst in the history of PNB. Now from that level even if you remain stable or kind of marginal improving that is not a real convincing factor to look at the stock. So, probably if somebody or some investor or a retail investor wants to look at any of the PSU banks I think State Bank of India (SBI) is the still better of among all other names.
They have excellent management, excellent franchise plus comparable to other banks the exposures to large leverage group is proportionately lower for SBI as compared to others. So, I would still among PSU even if you want to look something I think SBI is the better place to be in rather than looking at PNB.
Latha: I don’t think I know a brokerage which does not have a buy on SBI so that is given. Both of us are only asking you if you have a buy on any other PSU.
A: Not all.
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