When will bank stocks look up? Not anytime soon, say analysts

Sharing Is Caring:

Mumbai: Banking stocks were barely beginning to look up from the bad loans mess that had been haunting them since the 2018 IL&FS crisis, the coronavirus-induced lockdown surfaced.

That coupled with the subsequent moratorium on payments for three months, which has since been extended till August 31, has now raised the possibility of a fresh wave of bad loans for the domestic lenders, forcing investors to steer clear of them.

In a surprise announcement to cushion the impact of lockdown on the economy, the Reserve Bank of India (RBI) on Friday cut the policy rate by 40 basis points from 4.4 per cent to 4 per cent. The reverse repo rate has been reduced to 3.35 per cent. The central bank also extended the moratorium on loan repayments by three more months.

So, what lies ahead for the Indian banks? Don’t expect good news any time soon, say analysts.

“Every bull market has a leader, and banks were on the forefront of the previous bull markets as such markets were backed by GDP growth,” said Abhimanyu Sofat, head of research at IIFL Securities. “That could change now. We could have new leaders coming forward such as pharma and insurance. It remains to be seen how that pans out,” he said.

BSE Bankex has eroded a whopping 45.70 per cent value so far this year. All bank stocks have eroded wealth by 20-75 per cent so far this year.

Of the 41 listed banks, nearly half – mostly public sector lenders – have lost more than 90 per cent value from their record highs. Top private banks have been better placed relatively, due to strong divergence in asset quality trends.

The lockdown has significantly hit businesses and eroded the consumption power of individuals at large, and this has dented on their ability to pay back loans.

As of December 31, 2019, Indian banks collectively had nearly Rs 9 lakh crore non-performing assets (NPAs), and as per India Ratings. Some estimates show Covid-19 may create fresh slippage of up to Rs 5.5 lakh crore in a stressed case scenario.

The rating agency says Covid-19 measures are likely to result in another cycle of stress. Additionally, the pressure on non-corporate segments, which was already visible pre-Covid-19 days, is likely to intensify.

“What do you do when there is uncertainty all around. You don’t want to lend to someone, when there is a question mark on his ability to pay back. There is no confidence to lend,” Sofat said.

Banks have parked close to Rs 7-8 lakh crore of excess funds with RBI on reverse repo window, as they have turned risk averse to lending and demand too, has come down.

The steps taken by the governments and central banks in developed markets have left more money in the hands of people in those countries, but that is not the case in India.

There are concerns that a fragile banking sector can dent sentiment of the various stakeholders badly, as they are the backbone of the economy.

Things were looking up for banking stocks just before the Covid-19 crisis hit.

In January and February, there were hopes that at least 50 per cent of earnings growth would eventually come from banks, because provisioning would come off, as they recover on the asset quality front, Sofat said, adding that interest rates were falling too helping them to fare well on the treasury front too.

“Except for interest rates, all other parameters are negative now. GDP is shrinking. Forget demand, the ability of people to pay back is questionable,” he said.

RBI on Friday trimmed India’s growth forecast for FY21 as the coronavirus pandemic has disrupted economic activities.

RBI Governor said the GDP growth in FY2020-21 is expected to remain in the negative territory with some pick up in second half, pointing that economic activity in India was severely impacted by the nationwide lockdown in the last two months.

“Banking stocks are a proxy to the underlying GDP growth in the economy. When you are looking at -5 per cent GDP growth from 7 per cent earlier, what can you expect from banks,” said Ajay Bodke, CEO-PMS at Prabhuas Lilladher.

Bodke said the market had priced in strong medium-term growth prospects, and hence the sector had become a darling of investors, and many portfolios were highly overweight.

“Having endured years of accelerated provisioning and hit on profits, I think the belief was that profits will now soar. But Covid-19 spoiled it all,” Bodke expressed his concerns

Government must realise that unless they go out of way, and ally the concerns of banking sector, the cascading impact will be felt throughout the economy,” he said.

That said, banks are still better placed than their counterparts non-banking finance companies (NBFCs).

“Banks are at an advantage to some extent that they do not have the liquidity problem with them. Deposits continue to come in and with the fall in interest rates they will probably try to further reduce deposit rates, and this, protect their margins,” said Kunj Bansal, Partner & CIO, Sarthi Group.

Source link

Sharing Is Caring:

Post a comment