 "PSU Bank numbers suggest consolidation only way out of the mess")
Public sector banks have started announcing results and their impact is being felt on the markets. While the broad Nifty is trading flat, NSE Bank index is down by 1.16%. But this fall does not give the true picture. Within banks, NSE Private Bank index is down only 0.85% while the NSE PSU Bank index is trading 5.01% lower, the highest drop in any of the indices.
Bank of Baroda, the first among the big public sector banks, announced its results that has surprised analysts. The bank posted a loss of Rs 3,230 crore for the March 2016 ended quarter, roughly equal to Rs 3,342 crore it reported in the December 2015 quarter. The result: the market greeted it with a 9% fall.
Most analysts have downgraded the bank after its poor performance. Credit Suisse said that the bank's pre-provision profitability has come down to only 100 basis points. The bank will struggle to make double-digit Return on Equity (RoE) even in FY17-18. Kotak Securities has downgraded the stock to reduce, though it says the worst is behind it. But the bank will take a few years longer than expected to reach a steady state RoE of 15%. According to the report, there are better alternatives available in the market.
Bank of Baroda’s story is repeated with most of the public sector banks as they have started disclosing the actual value of non-performing asset. Though banks have disclosed most of their toxic assets, the focus has shifted to capital adequacy and the ability of the banks to absorb further losses. Had RBI not changed the norms of reporting Tier-1 capital, most of the banks would have had to run to the government for further capital.
Credit Suisse in a report on public sector banks has said that Tier-1 capital of these banks improved to 8-10% as most have used the recently allowed real estate revaluation to shore this up. The report says the losses of past two quarters have accounted for 12% of the net worth. Higher revaluation of assets and infusion of capital during the quarter have resulted in these banks being able to salvage the situation and reporting a 2% QoQ fall in net worth.
What the number indicates is that banks will need capital sooner than later. Lack of capital is preventing banks to fund the economy. Analysts are expecting loan growth from public sector banks to moderate further.
Realising the ground reality, finance minister Arun Jaitley in an interview to Business Standard hinted there can be a consolidation in the banking sector. The country needs healthier public sector banks, he added. There are only two ways to do that. One is by infusing capital, which the government is clearly hesitant in doing; and the second is by consolidating smaller banks with some bigger ones to create a more efficient banking system.
In a growing economy and the speed with which modernisation and technological changes are taking place, smaller banks will have a tough time to survive. Rather than infusing capital, merging makes more sense as the banks can rely on their collective strength and undergo the transformation process together rather than each one duplicating the same effort and fighting each other for market share.
There is another advantage of merger. The banks will have to completely disclose their assets for valuation purposes and the due-diligence process that goes with it. Further shocks cannot be ruled out in these banks. But this cleaning is needed for the survival of the banks and growth of the economy.
RBI had nudged banks to start disclosing their troubled assets. Ahough most banks have disclosed their stressed assets, analysts feel more is yet to come. The government will now have to use the consolidation angle to bring out all that has been hidden under the carpet by the banks.
From the present state of most public sector banks and the state of the economy, it is clear that consolidation is no longer a choice for the finance minister and the banks, it has now become a compulsion.
