Coalgate, bribery scams, bad loans: Have fed up investors given up on PSU banks?

The average 24% slide that PSB shares witnessed can be attributed to the three factors

Dinesh Unnikrishnan October 09, 2014 10:57:19 IST
Coalgate, bribery scams, bad loans: Have fed up investors given up on PSU banks?

Shares of most public-sector banks have fallen sharply in the last three months compared with that of private sector banks primarily on account of rising concerns among investors on account of the worsening financials of state-run lenders and recurring scandals such as the Syndicate bank episode.

An analysis done by Firstbiz showed that the share value of state-run lenders declined by an average 24 percent in the three months ended 7 October, while that of private sector lenders declined by just 5.1 percent.

During this period, the benchmark equity index Sensex on the BSE declined by 0.7 percent, while the Bankex, the index of major bank stocks, lost 1.3 percent. According to Vaibhav Agrawal, vice-president - research at Angel Broking, state-run banks' stocks have been impacted by a combination of factors such as bad loans and bribery scams in the recent past.

Among the state-run banks, the biggest loser is IDBI Bank Ltd, which lost 44 percent in the three-month period, followed by Syndicate Bank and Andhra Bank, shares of which lost 38 percent and 36 percent, respectively, on the bourses.

Among other major losers are Indian Overseas Bank (33 percent), Dena Bank (31 percent), Allahabad Bank (31 percent), Oriental Bank (31 percent) and UCO Bank (30 percent).

On the contrary, between January and July, returns from PSU stocks have outperformed that from private banks. PSU bank stocks gained 55 percent in the first six months of the calendar year, while private bank shares gave a return of 36 percent.

The sharp slide in PSB share prices can be attributed to the following factors:

One, is the pain of known and unknown bad loans on the balance sheets of state-run banks.

Of the total Rs 2.5 lakh crore bad loans in the banking system, over 90 percent comes from state-run banks. More worryingly, there is no clear estimate of the actual size of bad loans in state-run banks.

That's because experts believe that a sizeable chunk of the loans, currently being restructured, may be bad loans in effect, since banks typically prefer to show lower bad loan numbers by pushing loans to restructured loan category.

As Firstbiz has pointed out before, the hidden bad loans in the banking system can be more dangerous than the known danger of stated bad loans.

Total amount of restructured loans in the system is estimated about Rs 6 lakh crore (both through bilateral and CDR loan recasts). This, combined with bad loans, makes total chunk of stressed assets in the banking system about 14 percent of the total loans given by banks.

Besides, the Supreme Court's decision to cancel the coal blocks has presented potential bad loan threat to banks.

According to a report released by India Ratings and Research on Wednesday, formerly known as Fitch Ratings, adequate capitalisation is critical for Indian banks to mitigate concentration risks arising out of the Coalgate.

"We expect most private sector and large public sector banks to be better placed in handling credit costs arising out of this development with sufficient operating and capital buffers. However, 10 mid-sized PSU banks will be affected the most with their thin operating margins and weaker capitalization," India Ratings said.

According to the agency's estimates, the committed sanction to power projects in the private sector that are impacted by the judgement is around Rs 1.4 lakh crore. Of this, the committed exposure of banks is estimated to be around Rs 90,000 crore or about 1.2 percent of the total loans of the banking system.

"While large PSUs account for 46 percent of this exposure compared with 39 percent for the 10 mid-sized PSUs, in terms of assets, the risk is much higher for the latter group," the agency said.

Clearly, bad loan fears have scared investors away from PSU bank stocks.

Second, investors are also worried about the consequential rise in the capital requirement of state-run banks. Increasing bad loans would also mean that the capital requirement of these banks also go up since banks need to set aide money to cover stressed assets. Under norms, banks need to set aside anywhere between 20 percent to 100 percent of the loan value as provisions on bad loans.

For newly restructured loans, the provision is 5 percent of the loan value. Besides the bad loans, the fast approaching Basel-III deadline would also necessitate large amount capital infusion in state-run banks, burdening the exchequer.

According to India Ratings' estimates, the five large public sector banks accounting for 41 percent of the banking system's assets will need Rs 2.7 lakh crore of equity capital to maintain a Tier I ratio of 10 percent by fiscal year 2019. On the other hand, the mid-sized banks would require Rs 1.6 lakh crore.

"The recent developments further add to the recapitalisation pressures for the mid-sized public sector banks," the agency said.

Third, the corporate governance standards of state-run banks have taken a severe beating in the eyes of the common investor with more skeletons tumbling out of the closet in the recent months.

The arrest of S K Jain, former Syndicate Bank chairman, on 2 August, sent shock waves in the banking sector as investors were unsure about the extent of damage in the baking system. Clearly, they expect more such cases in other state-run banks as well.

Jain was arrested by the central bureau of investigation (CBI) for accepting bribe in exchange of credit facilities to few corporations including Bhushan Steel, which owes about Rs 40,000 crore to some 51 banks. The CBI is investigating in other banks as well and investors probably expect more bad news in the ensuing days.

As Firstbiz has noted before, the only way out for public sector banks in the long-term is to privatise state-run banks as recommended by the P J Nayak committee, which will offer the much-needed headroom for these banks to meet their capital requirements.

Besides, bringing in strong managements and private capital can turn India's state-run banks into stronger entities in a highly competitive banking world.

Data analysis by Kishor Kadam

Updated Date:

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