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The joke doing the rounds in the banking circles these days is that investors are better off putting their money in bank deposits than in bank stocks.
The absence of any bank stock from several model portfolios of leading brokerages indicates analysts are not just making light of a "stressful situation." The sharp run-up in bad loans is not just a cause because stressed assets are eroding capital ratios of state-owned banks. The markets had hoped the Reserve Bank of India's (RBI) new boss, Raghuram Rajan, would start easing rates to boost growth. Since that is not happening, bad debts will continue to rise through the current financial year. There could be some relief in FY15, if at all inflation abates and growth picks up.
Anyone buying into the recent rally of bank stocks only needs to look at the regulatory action and downgrades by rating agencies to figure it is nothing but a chimera. Moody's has downgraded the country's largest lender, State Bank of India's senior unsecured debt and local currency deposit ratings to 'Baa3'. This is primarily due to the steady pace at which public sector banks (PSBs) have been accumulating bad loans, which has affected capital ratios.
Emkay Global says the tier-I capital adequacy ratio of PSBs, adjusted for non-performing assets (NPAs), has declined to 6.9 per cent (despite continuous capital infusion) against 7.9 per cent in FY09. The unimpaired net worth (tangible net worth minus net NPAs) as a percentage of the total assets has declined from 5.5 per cent during the pre-crisis period to almost 4.2 per cent now and is likely to decline to 3.5 per cent by FY15. Number crunching by analysts suggests that going by the sharp accretion in stressed assets, PSBs will need capital infusion of Rs 40,000 crore over the next year to get their capital ratios in order.
Going by the numbers the corporate debt restructuring (CDR) cell is throwing up, the stress in the banking system is only worsening. According to Macquarie Capital, restructuring continues at a furious pace, with 14 cases being referred to the CDR cell in the first two months of the second quarter of the current financial year, amounting to Rs 22,000 crore. And, a lot of restructuring happens outside the cell's purview; it accounts for only 30 per cent of the total restructuring in the banking system.
Analysts also worry about the heightened credit/deposit ratio of banks. With the loan/deposit ratio at 78 per cent, banks will have no choice but to increase rates to garner more deposits. With credit growth steadily inching up to 18.2 per cent in early September and deposit growth well below, banks will look at another hike in their base rates. Analysts expect credit growth will moderate to 11-12 per cent, as macro economic conditions don't support such growth. Don't be fooled by the short rallies in the sector, caution analysts.
