We maintain our 8000 Bank Nifty target in next 12months.
Financials especially banking sector is at core of the Indian
equity markets. In past few months benchmark indices have shown a divergent
trend from the financial sector, as consumers, pharma and IT have held the
benchmark indices at higher levels while financials have corrected sharply. YTD
Bank Nifty is down over 10%, whereas Nifty is higher by ~2%. This being
inarguably the most over owned sector has evoked more concerns amongst
investors.
InvesTrekk Research has consistently maintained its underweight
stance on Indian banking sector for past one year. The reasons for our negative
view on Indian banking sector, especially PSU are simple. Consider the
following:
(a)
It is common knowledge that a large section of
India’s capital intensive long gestation enterprises is under tremendous
financial stress. These enterprises engaged in critical infrastructure sector
like roads, power, ports, airports, telecom, metals & mining etc. are vital
to aggregate health of the economy. Besides, SME segment that is critical for
overall employment and consumption growth, is also reeling under lower demand,
high input cost and higher financing cost.
It would be unreasonable to expect that Indian economy can
sustain even 5-6% growth level without these enterprises participating, as the
government’s fiscal condition doesn’t allow it to invest on its own.
The economic recoveries have never occurred when a large number
of corporate balance sheets are under extreme stress. This stress therefore has
to consolidate in fewer hands. Traditionally, the consolidation process has
seen banks taking over the major share of financial stress on their balance
sheets. The ‘B’ in the P/B ratio of banks is therefore subject to substantial
lower revision.
(b)
Unless the financial stress consolidation
process makes substantial progress, we may not see credit growth to industrial
sector returning on sustainable basis. The rising number of stalled and
abandoned projects and sharp fall in new project announcement is testimony to
this fact. It clouds the income forecast for banks. The present forecast of ‘E’
in P/E and ‘R” in ROA therefore may not make much sense.
(c)
We believe that a large amount of sub-standard
and loss assets have either been masquerader as restructured assets or
refinanced. The transaction usually involves hike in interest rates and
transaction fee. High interest and fee income of banks despite slowing
businesses and deteriorating asset quality could be explained by this.
Obviously, it is not sustainable as in most cases neither principle not
interest and fee are recoverable.
(d)
RBI has given enough panic signals in past six
months, though it has so far not taken any decisive action to stem the rot.
Politics rather than economics and commerce clearly seems to be the dominating
factor.
(e)
The excitement over new licenses is also not
comprehensible. If things progress normally, the banking license should become
open ended and therefore command no premium. Business wise, it will be long
before any new bank makes money.
Thought for the day
“Life is really simple, but we insist on making it complicated.”
- Confucius (551-479BC)
Word of the day
Gobbet (n):
A lump or mass.
(Source: Dictionary.com)
Shri Nārada Uvāca
What should Indians pray for – a strong US recovery followed by QE tapering and rate tightening or US recession and continuation of QE and low rates?
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