Despite gloom over NPAs, these banks could be good bargains

The RBI had met up with bank bosses recently to take stock of the bad loan problem and outline steps that would help banks clean up their balance sheets by March 2017.

Below is the transcript of Parveen Kumar and Nilesh Parikh’s interview with Latha Venkatesh and Sonia Shenoy.

Latha: Yesterday, we had that meeting in which the Union Bank of India's Chairman spoke at the end of it to the press and said that it was inconclusive. We have been getting statement from the Reserve Bank of India itself, the Governor, that he wants balance sheets cleaned up or assets provided for by April, 2017. What exactly is the dialogue between RBI and the banks? What exactly do they want to provide that you are not providing now?

Kumar: As we said earlier, I was not present in the meeting, se we have not had an internal discussion on this so far. So, I do not think it will be proper for me to comment on it right now.

Latha: I am not referring to the conversation in the meeting at all. The Reserve Bank separately told us and the Governor himself said that they have been having individual meetings with all the banks or conversations with all the banks and we know for a fact, and this was an on-the-record statement from the Governor that they want you to provide more. So, is the problem with the corporate debt restructuring (CDR) cases where promoters have not brought money? What exactly is the provisioning size you are looking at which might fall on your plate before the year is out?

Kumar: There is a dialogue that is going between the banks and the RBI. I do not think this has reached any conclusion, so unless we reach a stage where there is a general broad agreement on what needs to be done; I think it will be premature to start talking about that.

The intention basically is to see that how the bank’s balance sheet can be made healthier. If any provisioning has to be taken so that the banks are able to do that and then they can resume fresh lending to the sectors. As far as lending is concerned, the banks are going ahead and doing it. It is a question of what kind of demand is there in the market. So I think we need to probably give it a little more time for that dialogue to reach some conclusion before we take a call on that.

Sonia: Many of these public sector undertaking (PSU) banks, the stocks have become really cheap now, in fact, names like Punjab National Bank (PNB), Bank of Baroda, Bank of India are all trading at less than one time price to book which is forward, FY17 that is. Do any of them become attractive now or do you think that we will have to wait for a couple of quarters to see how the asset quality trends pan out before taking a call?

Parikh: From a PSU banks’ perspective, the way we have looked at the space, they have been quite attractive from a valuation perspective, less than book for quite some time. The way we have seen this is that we have tried to differentiate between banks, the larger banks and the small or midsized banks. We believe that the small or midsized banks will continue to consolidate given that RBI along with the Finance Ministry has asked them to find their own niche and some of them are in dire strait of capital. So, our preference has largely been towards some of the larger banks, specifically SBI and Bank of Baroda where we believe that there is a strong case for them in terms of business growth, the capital is very much adequate and there is a strategy for them to actually take on in terms of a market share perspective. Plus, asset quality is obviously not comparable to the private sector banks, but it is not on the other extreme that we have seen for some of the smaller state owned banks.

Latha: There was also news that we picked up from the RBI that they are a bit worried that in the strategic debt restructuring cases, banks as a group have 18 months to find a promoter and for that entire period, they do not have to provide for those loans. Is there any indication from the RBI that you should do some precautionary provisioning for this lot till you find a new promoter?

Gupta: This has just come and I think there are only few cases where we are looking at this as an option. I think we need to probably give it a more time to see how it really pans out and works. I do not really think there is anything on provisioning specific as such which has been told to the banks.

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Latha: But, what is the dialogue between RBI and the banks on the restructured assets. We heard very distinctly that Reserve Bank is a little uncomfortable in CDR cases where the promoter has not been able to perform his side of the commitment, either in terms of pledging shares or in terms of bringing promoter capital or in terms of asset monetisation. Was that the area of conversation? Do you have to do more provisioning in those cases?

Gupta: I think it is a part of the ongoing dialogue. As I told you, I think it is very difficult to slice and dice and say what exactly needs to be done in each of the cases. I think that is a very composite whole dialogue that is going on between the banks and the RBI. I guess at the end of it, actually, the banks will probably have to take a little bit of additional provisioning. How much of it that is really required to be done, I think we probably need to give it a little more time before we can take a call on that.

Latha: But, what is your sense on the quality of assets itself? I mean we get everyday fresh reverses form the global market which obviously, we were not prepared for. Who was prepared for steel selling at USD 270? These shocks have come completely unprepared for the global economy. Therefore, do you think that there will be more bad loans or defaults in any of these spaces or is most of that recognised?

Gupta: The recovery has probably been a little more prolonged than what we had anticipated. A lot of restructuring was done in the past hoping some uptick to happen. So, because of the global scenario, some of that recovery has not happened as expected which is probably the main reason for this stress which has been continuing for longer than what anybody in the market expected. So, everybody recognises that there is a stress which has to be dealt with and all of us are trying to deal with it in the best possible manner actually.

Sonia: The RBI has asked banks to recognise more restructured assets as bad assets, but as Mr. Gupta was pointing out, there could be some further stress because of additional provisioning. Which are the banks which could be impacted the most because of this you think?

Parikh: When you look at the space in terms of the state owned banks and the private sector banks, now, typically, we have seen the stress numbers be in an elevated range for the state owned banks in the range of anywhere between 10 to 15 percent and the private sector banks specifically, the corporate focused banks, ICICI Bank, Axis Bank, in the range of about 4-5 percent. Now, our sense is that if there is a restructuring, if there is a common uniform method of recognising assets, there could be some slippages; some increase in the headline numbers for some of these corporate focused banks and consequently, provisions will have to step up.

But, as a whole, I do not think, what we understand when we had discussions with banks is that 150 is a summation of individual accounts which have been given to banks. So, probably from an overall quantum perspective, we will not be able to comment, but, our sense is that the range specifically for some of these smaller banks could see a slight increase in their headline numbers on asset quality.

Latha: So, you have a buy on ICICI Bank, Yes Bank, any of those private sector banks?

Parikh: Yes Bank in fact is our top conviction call. That is the top pick in sector; we have a price target of about Rs 1,176. I just want to make one specific comment here that when you look at the corporate focused banks, where the issue is largely emanating is on consortium lending, so some of these corporate focused banks like ICICI Bank, Axis Bank have been a part of consortium with some of these state owned banks, whereas the smaller emerging banks like an IndusInd Bank and Yes Bank have actually largely stayed away from the consortium lending. So, my guess is that you should not see too much of issues from recognition perspective in some of these midsized banks.

Latha: You said that banks are likely to have to provide more in the coming quarters. How much more might be the provisioning burden?

Gupta: Unless we have a conclusion on what exactly needs to be done, it is very difficult to say. I think that is a dialogue which is still going on, so need to wait for some more time.