Yes Bank up 97% in fiscal 2015: Private banks return way more to investors than public lenders

Risk-averse private sector banks remained the darlings of stock market investors in fiscal year 2015, giving almost double the returns compared to capital-starved, stress-ridden state-run banks. Analysts do not see this trend changing in the approaching year.

hidden April 01, 2015 18:46:41 IST
Yes Bank up 97% in fiscal 2015: Private banks return way more to investors than public lenders

By Kishor Kadam and Dinesh Unnikrishnan

Risk-averse private sector banks remained the darlings of stock market investors in fiscal year 2015, giving almost double the returns compared to capital-starved, stress-ridden state-run banks. Analysts do not see this trend changing in the approaching year.

Market capitalization of 25 state-run banks grew from Rs 3.25 lakh crore to Rs4.05 lakh crore in fiscal year 2015, posting a growth of 24 percent, while that of 15 private sector banks, grew to Rs 8.07 lakh crore, up from Rs 5.28 lakh crore—a growth of 52 percent.

During this period, India’s benchmark equity index, Sensex, on BSE returned 25 percent, while the 50-share index, Nifty on the National Stock Exchange, gained 27 percent. Bankex, the index of major bank shares, grew by 43 percent.

Among private sector banks, Yes Bank and Axis Bank emerged as outperformers, jumping 97.47 percent and 91.86 percent respectively in the fiscal year, followed by Lakshmi Vilas Bank and DCB Bank Ltd, which clocked growth of 90.6 percent and 82.53 percent respectively.

Notably, Dhanlaxmi bank was the only private lender, which yielded negative returns among private banks in fiscal year 2015. On the other hand, J&K bank was the biggest loser, witnessing erosion of 38 percent of its share value during the fiscal.

Biggest gainers among state-run banks in fiscal year 2015 were Central Bank of India, whose share prices grew by 113 percent, followed by State Bank of Bikaner (79.71 percent) and Indian Bank (50.13 percent).

Interestingly, country’s largest lender, State Bank of India gained 39 percent in fiscal year 2015, more than its nearest competitor ICICI, which grew 27 percent.

There are two logical reasons why investors preferred private banks over state-run lenders.

One, rising chunk of bad and restructured loans has been putting pressure on the earnings of state-run banks, which has acted as a clear turn off. Of the total Rs 2.9 lakh crore, gross non-performing assets of (NPAs) of listed banks, about 90 percent is on the balance sheets of public banks.

Also, a significant chunk of restructured loans in the banking sector is also on the balance sheets of these entities, increasing their provisioning burden. Beginning this month, banks have to make substantially higher amount of provisions on restructured loans, at par with, bad loans.

Under this, banks need to make 15 percent provisioning on fresh restructured loans as compared with 5 percent currently, which will significantly add to the provisioning burden of banks.

State-run banks have made total provisions of Rs76,382 crore in fiscal year 2014. As against this, in the first three quarters of fiscal year 2015 alone, these entities have made provisions of Rs53,626 crore. Fourth quarter numbers aren’t available. Global rater, S&P has warned that capitalization is a key constraint for some public sector banks in India.

Presently, the stressed assets in the banking system is about 12 percent of the total bank loans.

Yes Bank up 97 in fiscal 2015 Private banks return way more to investors than public lenders

Reuters

Two, availability of capital has emerged as a major concern for state-run banks in fiscal 2015 and is likely to remain in the approaching year as well, especially after finance minister Arun Jaitely allocated merely Rs 8,000 crore, about half of what state-run banks originally require, in the current fiscal.

Last fiscal year too, government had infused only a part of the promised Rs 11,200 capital in public sector banks, saying capital allocation will be based on performance from now onwards.

Experts have flagged warnings that weak capital base and persisting stress in the economy is likely to act as a major dampener for state-run banks’ earnings.

“We expect the profitability of Indian public sector banks to remain weak, and banks' credit costs to remain elevated," said Amit Pandey, S&P credit analyst in a March 18 note.

“That's because of underprovisioning for nonperforming loans, slippages from standard restructured loans, and a higher provisioning requirement for fresh restructured loans effective April 2015,” Pandey said.

Raters have also warned that weakness in state-run banks, if persists, can adversely impact their ratings. “The stand-alone credit profiles and ratings on some public sector Indian banks are sensitive to deterioration in their asset quality and erosion in capital and earnings,” S&P said.

Brokerages too have cautioned on the rising risk-perception on state-run banks. “While PSU banks may appear cheap, a sharp near-term re-rating is unlikely, given their low capital adequacy and high share of stressed assets that would make their book-values appear deceptive,” brokerage house Emkay said in a 30 March note.

Yes Bank up 97 in fiscal 2015 Private banks return way more to investors than public lenders

Banks

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On the contrary, private banks have mostly stayed  away from high risk lending such as long-gestation infrastructure projects, farm and loans to mid-sized companies. They have, instead, been focusing on loans to retail customers to cut down risks.

These entities are also better positioned in terms of capital readiness to meet the Basel-III capital norms. “We believe that rated private sector banks are better placed than their public sector peers to meet Basel III capital requirements,” S&P said in the report.

On the other hand, the fortunes of state-run banks will heavily dependend on capital availability and recovery in the economy.

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