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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!!