Moneycontrol Pro Panorama: When banks look like Barbies  

Banks may look flawless like Barbies now, but let's hope the smiles on investors' faces don't end up becoming plastic ones

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Greta Gerwig’s live action film Barbie on the doll that characterized the childhood of girls the world over hits theatres today and the media blitzkrieg has only been overshadowed by the frenzy among viewers to see the film.

Barbie represents a perfect world of pink, plastic, cotton candy and smiles and evokes anything between optimism and exuberance. It won’t be a stretch to say that the Indian equity market is in Barbie’s fantastic world of plastic positivity right now. And India’s banks are the Barbies.

Bank Nifty has matched step for step with the Nifty 50 in the forward march to higher altitude, both clocking an over 5 percent gain within a month. Over a period of one year, the index has outperformed the Nifty significantly. This is not without reason, but perhaps it is without restraint.

Investors have been size-agnostic when it comes to the financial space. From the largest private lender HDFC Bank to the small CSB Bank, investors have driven up market valuations. What’s more, shares of Utkarsh Small Finance Bank listed at a 60 percent premium to its issue price, a sign that microfinance too is back on investors’ good books.

If you thought a micro lender getting a 60 percent premium listing was exuberance, wait till you set your eyes on public sector bank shares. The Nifty PSU Bank index has surged 12 percent in the past one month, leaving the broader Nifty behind in the dust. Shares of some banks such as Union Bank of India have clocked an eye-popping 28 percent increase in their valuation in this period.

Is it justified? Is life in plastic really fantastic?

A glance at the first quarter performance of some lenders shows a mixed bag. For instance, HDFC Bank met expectations on profitability, but had a softer loan growth and a slowdown in retail deposit growth. Mid-sized IndusInd Bank also came in true to expectations by reporting a robust set of growth and asset quality metrics. CSB Bank reported a 21 percent healthy growth in deposits, something that behemoth HDFC Bank couldn’t. But the small lender caters to the vulnerable small business borrowers and gold loans, which get hit the first during a downcycle.

Public banks, the battered lot during the better part of the last decade, are now the flavour of the season. The multiple re-ratings of PSU bank shares have been driven by the improvement in asset quality. The argument is that PSU bank valuations have been decimated and their asset quality improvement makes them great bargain pickings for investors. That said, Union Bank of India’s net profit growth and loan growth do not overshadow its historic trend. Granted, quarterly net profit more than doubled led by a drop in provisions, but loan growth of 12 percent lags private peers. Even its gross bad loan ratio at 7.34 percent is way above private sector peers and perhaps even other public sector banks that are yet to report their numbers.

The main challenge for banks is getting funds to keep credit disbursal chugging along faster. That means deposit growth must accelerate or capital must be available readily and cheaply. The signs of both are not yet clear. PSU banks cannot match private peers in aggression for deposits. Raising money from the bond market for capital is not as easy as before. Also, investors must keep in mind that banks did not improve their asset quality metrics entirely by getting their monies back. Write-offs and haircuts also have a large share.

The upshot is investors must keep in mind the challenges on the deposit side for the sector and wait for conclusive proof that lenders have improved their risk underwriting methods.

Banks may look flawless like Barbies now, but let's hope the smiles on investors' faces don't end up becoming plastic ones.

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Aparna Iyer
Moneycontrol Pro