 "Banking rally doesn't support fundamentals")
Banks - meaning basic commercial banks - can be notoriously difficult to value. Profits on a quarterly basis might mean nothing. One useful indicator is the interest rate trend. If interest rates are coming down, or are stable, it's likely to be good for banks. Lower interest rates create demand for credit, as well as improving the value of prior loans made at higher interest rates.
Another interesting number is the credit-deposit (C-D) ratio. If the C-D ratio is very low, it's an indication there isn't much demand for credit and banks will struggle to generate business. If it's too high, the banking system is likely to be stressed out by excessive demand. Apart from C-D , bad loans and requests for corporate debt restructuring are good indications of stresses on the banking system.
Apart from these, sensitivity to interest rate changes will always be a profound factor and it must be judged case-to-case. Also, within the Reserve Bank of India (RBI) guidelines, banks can be either optimistic or pessimistic in how they choose to recognise sticky loans and it isn't easy to recognise the levels of ever-greening or bilateral restructuring.
Broad money supply, or M3, has seen a lower rate of growth in the past year, at 13.3 per cent. Deposit growth (M3 includes the sum of all types of bank deposits) has also been slow at 14 per cent. Credit growth has also slowed, dropping to under 14 per cent. M3 grew at over 20 per cent in 2007-2010 and was growing at over 15 per cent until 2011-12. Deposits grew at over 20 per cent through 2008-2010. The credit-deposit ratio is close to 75 per cent and unlikely to fall. This is very tight in the Indian context. So, banks would find it tough to increase lending by a great deal.
Reserve money (M0) and M3 growth rates peaked in September-October 2013. This was probably because RBI decided to boost reserves with a swap deal at that time. RBI encouraged banks to get non-resident Indians to deposit forex; it took the forex and gave the banks rupees. Those rupees would have led to new peaks in M0 (and by extension, M3) creation. Despite that boost, money supply has grown slowly in 2013-14. Slow credit growth plus slow money supply growth suggests low demand. Ironically if demand does improve, the high credit-deposit ratio indicates it will be a struggle to find capital.
Bad loans and corporate restructuring requests grew alarmingly through 2013-14. This was not surprising as it was the third year of slow GDP growth. However, RBI suggested bad loans also increased due to what it termed "suboptimal credit management" among public sector banks (PSBs).
PSBs offer about 70 per cent of all the credit in the system and these banks saw gross non-performing assets (NPAs) rising to 12 per cent of the entire loan book by 2012-13. The record number of restructuring requests in 2013-14 and the results through the first nine months suggests NPAs as a percentage of the loan book continued to grow in the last financial year.
RBI has also postponed the timetable for making the banking system compliant with Basel-III norms.
Basel-III compliance involves raising large sums for capital infusions to improve Capital Adequacy Ratios (CAR). CAR falls when provisioning must be done for bad loans. RBI might be taking cognisance of this in the postponement. It is also true that raising capital either through subscription by the cash-strapped government or via the capital market will not be easy.
The data seem to indicate the banking system is not in the best of health. Chances are, it will take a while for the NPAs to decline to comfortable levels, and for deposits and credit to grow at a faster rate. This doesn't gel with a stock market is merrily bidding up prices.
Another interesting number is the credit-deposit (C-D) ratio. If the C-D ratio is very low, it's an indication there isn't much demand for credit and banks will struggle to generate business. If it's too high, the banking system is likely to be stressed out by excessive demand. Apart from C-D , bad loans and requests for corporate debt restructuring are good indications of stresses on the banking system.
Apart from these, sensitivity to interest rate changes will always be a profound factor and it must be judged case-to-case. Also, within the Reserve Bank of India (RBI) guidelines, banks can be either optimistic or pessimistic in how they choose to recognise sticky loans and it isn't easy to recognise the levels of ever-greening or bilateral restructuring.
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As of now, interest rates are high. But RBI seems to be hoping inflation has peaked and in that case, rates have also peaked. The acid test will be the 2014 monsoon. If there is a sub-par monsoon, food inflation could force the central bank to raise rates again.
Broad money supply, or M3, has seen a lower rate of growth in the past year, at 13.3 per cent. Deposit growth (M3 includes the sum of all types of bank deposits) has also been slow at 14 per cent. Credit growth has also slowed, dropping to under 14 per cent. M3 grew at over 20 per cent in 2007-2010 and was growing at over 15 per cent until 2011-12. Deposits grew at over 20 per cent through 2008-2010. The credit-deposit ratio is close to 75 per cent and unlikely to fall. This is very tight in the Indian context. So, banks would find it tough to increase lending by a great deal.
Reserve money (M0) and M3 growth rates peaked in September-October 2013. This was probably because RBI decided to boost reserves with a swap deal at that time. RBI encouraged banks to get non-resident Indians to deposit forex; it took the forex and gave the banks rupees. Those rupees would have led to new peaks in M0 (and by extension, M3) creation. Despite that boost, money supply has grown slowly in 2013-14. Slow credit growth plus slow money supply growth suggests low demand. Ironically if demand does improve, the high credit-deposit ratio indicates it will be a struggle to find capital.
Bad loans and corporate restructuring requests grew alarmingly through 2013-14. This was not surprising as it was the third year of slow GDP growth. However, RBI suggested bad loans also increased due to what it termed "suboptimal credit management" among public sector banks (PSBs).
PSBs offer about 70 per cent of all the credit in the system and these banks saw gross non-performing assets (NPAs) rising to 12 per cent of the entire loan book by 2012-13. The record number of restructuring requests in 2013-14 and the results through the first nine months suggests NPAs as a percentage of the loan book continued to grow in the last financial year.
RBI has also postponed the timetable for making the banking system compliant with Basel-III norms.
Basel-III compliance involves raising large sums for capital infusions to improve Capital Adequacy Ratios (CAR). CAR falls when provisioning must be done for bad loans. RBI might be taking cognisance of this in the postponement. It is also true that raising capital either through subscription by the cash-strapped government or via the capital market will not be easy.
The data seem to indicate the banking system is not in the best of health. Chances are, it will take a while for the NPAs to decline to comfortable levels, and for deposits and credit to grow at a faster rate. This doesn't gel with a stock market is merrily bidding up prices.