Book profit in bank stocks even as moratorium period ends today: Analysts

Bank stocks gained ground at the bourses in early morning deals on Monday, as investors looked forward to the debt restructuring system kicking-in from September 1, allaying concerns regarding the six-month moratorium period.  

Nifty Bank index topped the 25,000-mark, and hit a high of 25,233, up 2.4 per cent on the NSE. However, a correction in the markets on account of geopolitical issues saw the markets and these stocks pare morning gains as trade progressed.

Individually, IndusInd Bank soared 8.2 per cent in the intra-day trade to quote at Rs 711. Axis Bank gained around 5 per cent, ICICI Bank, State Bank of India (SBI) and HDFC Bank added 3 per cent each. Bandhan Bank, Federal Bank, Bank of India, and RBL Bank, meanwhile, rose between 2 and 4 per cent.

But, will things actually change between August 31 and September 1?

Deepak Jasani, head of retail research at HDFC Securities, believes that even as the Reserve Bank of India (RBI) has allowed debt-recast under the last monetary policy meeting, it has also allowed extension of moratorium on case-to-case basis under the debt-recast provision itself. "Thus, while blanket moratorium is over, individual moratoriums may still be in place," Jasani said.

As per the guidelines issued by the RBI, retail and SME loans can be directly considered for restructuring from September 1, while corporate loans will have to be selected on the basis of the KV Kamath Committee guidelines.

According to a Jefferies note, banks are not in a rush to restructure loans and will actually look to repayments during September before considering restructuring.

“It is quite likely that restructuring will actually start only from October onwards. Also, as the window to restructure loans is available until Dec-20, we expect clearer trends on the level of restructuring as part of Q3FY21 results in Jan-21,” wrote Prakhar Sharma, an equity analyst at Jefferies in a report dated August 30.

Further provisioning needed?

According to Jasani, banks may continue to set aside provisions in the July-September quarter (Q2FY21) as cases where they can neither go for restructuring (in September) nor receive any payment might need provisioning. “This is one dilemma banks will have. They have already set aside huge Covid-19 related provisions but this may continue in Q2,” he says.

So far, there have been varied views with regards to the percentage of loans that may seek restructuring. According to another Jefferies note dated August 6, 30 per cent - 40 per cent of loans under moratorium might seek restructuring, which implies that restructured loans for large lenders could be 5-10 per cent of loans — higher for corporate lenders.

India Ratings and Research, on the other hand, pegs the restructuring figure at Rs 8.4 trillion--about 7.7 per cent of total credit in March 2020. “Almost 60 per cent of Rs 8.4 trillion credit is already susceptible to slip into NPA category after lockdowns to contain the coronavirus devastated the economy, in absence of restructuring... The total amount recast could be higher if restructuring in non-corporate segments exceeds 1.9 per cent of the total bank credit,” it said in an August 20 note.  READ HERE

With relatively tighter loan restructuring norms, such as eligibility of only SMA-0 borrowers as on March 1, 2020, independent credit assessment (ICA) of the resolution plans (RP) and a higher upfront provisioning requirements, Icra expects the loan restructuring of around 5-8 per cent of the overall loans. READ HERE

Investment Strategy

With hopes riding high on debt-recast and better-earnings, Nifty Bank index has surged 13 per cent in August. In comparison, the Nifty50 index has gained 5 per cent till Friday, ACE Equity data show. But the rally may see a halt in the near-future.

“In the current market, the question is about re-rating the entire market due to the liquidity boost and individual sectors/stocks fetching higher P/Es. One doesn’t know if the re-rating will stop or continue... There will be profit taking in the interim, but going by the current mood, we are still headed higher as long as global risk-on sentiments continue and liquidity flows keep coming,” says Jasani of HDFC Securities.

Fresh investors should remain cautious while entering the current market, while incumbent investors may look at partial profit booking and wait for the balance as reversal of sentiments, as and when it happens, can be swift, he suggests.

"Moratorium rates have come off in Phase 2, while ensuing restructuring may defer or moderate the NPA pain, though high provisioning requirements would still hurt earnings in FY21. Recent capital raise by banks/NBFCs will further improve their shock absorption capacity and could come handy when growth revives in FY22 as risk-aversion recedes. Thus, we turn cautiously optimistic on the sector. Our preferred picks among banks are ICICI and HDFC Bank followed by SBI in PSBs,” said analysts at Emkay Global Financial Services in a report dated August 29.