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Saturday, May 25, 2013

Indian Banking Sector-A Deeper Malaise

The State Bank of India declared its results on 23rd May.Profit was down 19%.NIM was stable near 3.3%.Fee growth was lacklustre but what was shocking was the slippage in asset quality/recoveries that led to higher than expected provisioning.Delinquecy ratio of 3.5% was far higher than average. 
  
Financial Summary
Y/e 31 Mar (Rs m)FY12FY13EFY14EFY15E
Total operating income576,426 602,942 691,205 803,660
yoy growth (%)19.2 4.6 14.6 16.3
Operating profit (pre-prov)315,736 318,790 370,113 437,616
Net profit117,074 148,742 166,069 193,438
yoy growth (%)41.7 27.1 11.6 16.5





EPS (Rs)174.5 217.2 242.5 282.5
Adj.BVPS (Rs)1,015.3 1,065.0 1,229.3 1,423.1
P/E (x)12.7 10.2 9.1 7.8
P/Adj.BV (x)2.2 2.1 1.8 1.6

Quantum of net NPAs for the sector as a whole have increased 55% while credit growth has increased by just 15% till December 2012.While some amount of increase in NPAs during a slowdown are justified,the sharp rise has left many unanswered questions.
 
The Infrastructure sector has mean a major player in this.Lack of last mile clearance,theUltra Large Power Projects(ULPPs) not taking off due to unavailability of raw materials(read Coal),priority sector lending to farm sector have left Indian Bankers holding the can.
 
De-growth from 8% to sub 5% and onstnacy of RBI to lower the CRR aggresively means deposit growth has outstripped credit demand in the last two years.
 
To get around this and secure profits the Banking segment is once again turning to consumer finance as a medium to make money.2007-2008 was a bloody year for assorted financiers,credit card issuers due to high defaults.There does not seem to be an alternative?In such a competitive market big players like RBS and even Citi are finding it tough to find profitability.Morgan Stanley has agreed to sell its private banking business to Standard Chartered Bank as per reports.
 
The problems in the manufacturing sector(GDP at 5% but IIP .5%) are the systemic issue.The big boys of Indian industry are just not borrowing and if they are then there are problems with repayment.The shadow of Kingfisher Airlines bankruptry looms large on SBI,PNB,Indian Bank and a few others.
 
Indian promoters issued FCCBs(Foreign Currency Convertible Bonds),hoping that three or four years down the line they would get lower rates,converting it from debt to equity.Unfortunately the kind of valuations the promoters wanted never came to play and the FCCBs became a debt.Its scary that almost 71% of all FCCBs have been restructured and quite a few promoters are fighting bondholders as they have not been able to agree to a rollover.
 
Manufacturing,Agriculture and Aviation are weighing heavily on Indian Banks.With few opportunities for consolidation,strict RBI regulations it seems that the sticky issues will take some time to go away.
 
Afterall when a large infrastructure project takes an average of 47 years to break even(according to a Mckinsey Report 2012),what chance of a Banker making any profits in the short term!!                  

Saturday, May 18, 2013

The Silk Road:India,China A New Begining

The Chinese Premier Li Keqiang visits India after 27 years of what was a friendly and positive meeting.Let us hope that after years of rancour,border disputes,both countries will put a new perspective on a relation since the times of Marco Polo...

206 B.C-220 A.D.The caravan comprised of seventy Bactrian two humped camels loaded with jade,lapis lazuli.Silk was yet to be discovered.And the name ‘Silk Road’would not emerge until at least the 8th Century.But Asian banking was at its zenith!The  camels were but a means of ferrying goods and culture that at a very early stage in human history united the Hungarians,Persians,Turks,Egyptians,Chinese and India.

In Medieval times the discovery of sea routes and the rise of the West led to the disappearance of this famed corridor of Mid and Central Asia.

The importance of cutting costs in transporting the huge manufacturing out of China to western markets would be easier if such a road could lead to the port of Kolkata(Calcutta) over the now open for trade Nathu La pass in Sikkim straight onto the Bay of Bengal for transhipment to Europe ,Africa and the Americas.

Major ports in China lie on the eastern seaboard-Dalian,Zhenjiang,Shenshen etc much further east than Kolkata.The only shorter route would be if the arctic passage could be opened up and Canada allowed the Northwest passage?

Political compulsions are making China skirt India and try and use the Pakistani port of Gwadar and develop deep water capacities in Myanmar as per 2011 news reports.

With a slowdown in global GDP and the need to find efficient systems for distributing finished products globally it makes sense for a “NEW” Silk Road to be established.Synergies with Kazakstan,Krygzstan and other Baltic republics rich in mineral wealth could be moved through pipelines and would be cost effective for energy starved India,Bangladesh,Pakistan,Nepal and Myanmar.

Every economy in South East Asia needs that boost.But will complex politico-military compulsions come in the way?


Sun-Tzu

Let us hope that is true for all of us on the planet.

Sunday, May 12, 2013

Hard To Believe New Dawn in Pakistan?

Mian Nawaz Sharif comes back as the new Prime Minister of Pakistan once again.So what is new one is tempted to ask?
 
Pakistan is a strange country.Formed on religious lines one would have thought that a muslim majority nation would be at peace with its citizens and progress rapidly given the hardworking,resilient character of its people combined with a plethora of natural resources,bauxite and ore mines in Sindh,fertile delta in Punjab,zince.lead quarries in Baluchistan.Natural deep water port in Karachi et all.
 
The reality has been vastly different with Sunnis fighting Shias,Sunnis and Shias murdering the Hindu and Hazara minorities,the Taliban desirous of taking everyone back to the medieval Caliphate times and a general sense of anarchy.
 
My grandparents who had seen the partition of 1947 first hand told stories of the best part of Punjab falling to Pakistan,a land of brimming rivers,green fields of unimaginable riches.Pakistan has not lived up to its legacy.
 
If Nations had psyches we would say that Pakistan was born manic depressive.Lies,deception and a belief of its politico-military class to live in an alternate reality led to 1971 war and the birth of Bangladesh.The 1965 war which almost finished them until Prime Minister Nehru and the United Nations saved their bacon.
 
It is difficult to separate Nawaz Sharif from Kargil.All the polite noises he has made in his campaign of holding discussions with the Indian leadership is nothing new.Pervez Musharraf had the Agra summit and then what?If Indian foreign service officials start taking all the words as positive,I for one would feel apprehensive as the new PM has to take care of the Taliban and all the other sundry militias that proliferate in the back alleys of Karachi,Rawalpindi and Lahore.
 
Can the civilian leadership take strength from its youth and translate it into anything meaningful.Nothing mirrors the dichotomy more than a person like Imran Khan,jetsetting cricket married once to a jewish heiress.Modern,progress one may think!Yet he supported the conservative,religious fundamentalists.easy to dismiss as vote bank politics,but just shows the exigencies that even so called moder faces of Pakistan and the freudian bargains they need to make.
 
Beware.

Sunday, May 5, 2013

RBI:Unexpectedly Hawkish in May Policy?

The RBI cut the repo rate by 25 basis points as expected.The unexpected hawkish stance was a shock for most commentators,what with the inflation ebbing and international crude oil prices too coming down below the pschological $100 barrel level.
 
Difficult to assess the direction as RBI expects a shallow recovery in 2013.Investment flows into India have been negative in April after a stupendous inflow in the preceding 3 months.The rift between India's central bank and the Economic Advisory Council is well known.
 
"I think there is a little bit of disappointment because of the lack of a cash reserve ratio cut. The market will take some time to fully digest this statement"-Shubhada Rao,Chief Economist,Yes Bank.
 
The markets so far have not reacted too badly to announcement of 5.7% growth projected here the Finance Minister talks of reaching 8%.For what I understand of the policy put forth into the public domain there is room for a further 50 basis points cut in 2013 if growth continues to disappoint and providing inflation stays within 5-6%levels.
 
I expect the nifty to stay in the 6000-5600 range with bouts of volatility that will test the mettle of the best traders in the markets.Political compulsions are are negative burden on the economic scenario.If one looks at 2014,the elections are likely to throw up another hung house with the opposition yet to come up with a coherent candidate who can articulate a vision for growth.
 
From those in the business community my feedback is of Mr Narendra Modi being the frontrunner.I have in earlier blogs mentioned that Gujarat with its unique geography has enough barren land that can be offered as incentive to industrialists to set up huge plants.This policy might not be conducive to the rest of the country.Given the example of Bengal that is on tops in terms of malnutrition and food shortages.The cost of converting arable land that gives 3 crops a year into commercial industry needs a longterm study of the benefits.
 
Lets face it,India is facing a test internally with slowing growth,externally with an agressive China on its borders and politically with all the scams that keep happening almost at the rate of one a week!
 
With the Fed keeping rates down the worst fall in Gold in a decade has stabilized and inflows into emerging markets the India bourses may not see a bad year but do not be too optimistic.

Wednesday, May 1, 2013

What will the Reserve Bank say on 3rd May

Governor Rao needs to do something out of keeping with his dovish mein!Be hawkish on rate cuts,CRR?Maybe?Maybe not?RBI is likely to cut rates by 25 basis points with an accompanying cut in CRR rates injecting liquidity into the banking system.

“Liquidity conditions have still not improved and so RBI can do a surprise CRR cut to be a bit more forceful on banks to ensure transmission,” said Abheek Barua, chief economist at HDFC Bank, who still expects RBI to keep the CRR on hold.
 

With growth at a decade low 5%,the fall in international crude and gold prices has come at the right time to augment growth measures.The RBI governor has consistently maintained that his first priority is to fight inflation and only after that would he look at growth.Its clear that stagflation has been a recurring nightmare for him and his policy advisors.

Credit growth at Indian banks touched a more-than-three-year low of 13.9% in early April as companies shelved project plans, consumers refrained from big purchases and lenders were wary of rising bad loans in a slowing economic cycle.
India’s current account deficit touched a record-high 6.7% of GDP in the December quarter, prompting Subbarao to warn in March that there was “quite little” room for further policy easing.
However with fall in base commodities the Current Account Deficit(CAD) is likely to shrink to 4.4% in March qtr and rise in exports will give some relief. The second-order impact of a lower fiscal deficit will create room for more savings, help in bringing down inflation and in turn reduce demand for imported gold and cool off current account deficit. This will give RBI some space to sound neutral to hawkish in its rhetoric,” said Rahul Bajoria, regional economist at Barclays Capital.
Having said all this I feel that cement stocks are close to bottoming out and the life is coming back in Telecom stocks that have faced headwinds since last year - RCOM and Idea have already moved up close to 67% and 30% respectively.Bharti Airtel looks like staying above 270 levels hence can be looked at as a buy.
The increase in the stake by Unilever in HUL to 75% is a better vote of confidence in the worth of the Indian consumer than any analsytspeak.If the nifty stays above 5660 we can look at a revival in the markets.Sudden,strong volatility will be there until the political situation improves but not expected before the 2014 general elections.Good time for short term traders!