Thursday, September 8, 2016

Bank on banking - 2

"Pick battles big enough to matter, small enough to win"
—Jonathan Kozol (American, 1936)
Word for the day
Peradventure (n)
Chance, doubt, or uncertainty.
Malice towards none
'K' is a popular word not only in Pakistan but in UP also:
Khan (Azam)
Khap (Jat and Yadav)
Khaat (Congress farm loan waiver)
Kashi (BJP)
Kanshi (BSP)
First random thought this morning
The UP elections have begun with Farm loan waiver (Cong) and free smart phone (SP).
The competition will intensify as BJP and BSP join the fray in next few weeks.
The voters will have really tough choices to make this time!

Bank on banking - 2

The following five issues in particular have impacted the investors' sentiments insofar as PSBs are concerned.
(1)   FCNR redemption: Potentially US$24bn redemption of FCNR deposits received from NRIs in 2013 is due between September and December 2016. It is feared that the redemption may cause material pressure on banks' liquidity & credit growth and may cause high volatility in currency and debt market.
       In my view, all these fears are mostly unfounded. These appear premised on the fallacy that Indian banks and banking regulator are highly inefficient and are even unable to foresee 3months forward!
       I do not subscribe to this notion and therefore not worried at all about this event. (More on this tomorrow)
(2)   Underreported NPAs: The asset quality review mandated by RBI may have taken care of a large part of this problem. My discussions with many bankers and their auditors suggest that in many cases material over provisioning has been made.
       In my view, though in the current economic environment one cannot rule out new accounts slipping into red, the problem from hereafter should be a normal business proposition and not a catastrophe.
(3)   Capital inadequacy: This is a serious problem at this point in time, but certainly not incapacitating. Many PSBs need material capital infusion to meet the Basel III norms in next 2-3years.
       In my view, they should have no problem in raising fresh capital from government or public, provided they are in a position to deploy this capital profitably. This could be a chicken-egg story in the short term, but in medium term it should not be. Those who are profitable get the capital, and those who are not get acquired by big brothers.
(4)   Competition from private banks: This is a serious issue and needs to be adequately factored in investment decisions.
       I believe, given the dominant market share of PSBs and vastly underpenetrated market, the large five PSBs could survive profitably and grow for next one decades at the least. I am not inclined to look beyond these five for my portfolio.
(5)   Credit growth: This is normal business cycle issue and not a structural one. In my view, the credit growth is bottoming and should begin to pick up in next 3-4 quarters.
I would share my views about these issues in detail, over next few days.

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