Markets
BSE See NSE See 39,599.19
164.25 (0.42%)
collapse Related Readings collapse

Banking sector - Paralysed by inefficiency and irregularities

| 10/24/2011 12:05 PM Monday

Two events that took place last fortnight – the downgrading of SBI by Moody’s Investors Service and reports of alleged financial irregularities at Dhanlaxmi Bank – have raised further questions about the performance of the banking index, which is already underperforming the broader market on a YTD basis. Events like these dent the performance of the entire sector. Readers must be wondering about the impact that these events will have on the banking sector in general, and on the banks involved in particular.

As far as SBI is concerned, it is clearly a case of political inefficiency and policy paralysis. Moody’s Investors Service downgraded SBI’s bank financial strength rating (BFSR), or stand-alone rating, from C− to D+. The revised rating maps to a Baseline Credit Assessment (BCA) of Baa3. One of the reasons cited by Moody’s for such an action was the bank’s high level of NPAs (Non-Performing Assets). As of 30th June 2011, SBI’s gross NPAs touched a three-year high of 3.52 per cent of loans. Compare this with other leading banks, including private and public sector banks in India that have gross NPAs of less than three per cent, barring ICICI Bank, which has gross NPAs of 4.4 per cent. SBI does not even have adequate capital to guard against such high level of NPAs. The bank reported a Tier 1 capital ratio of 7.60 per cent as of 30th June, 2011, against the minimum requirement of eight per cent that the government had committed it will maintain in public sector banks. Other large public sec-tor banks have better capital adequacy ratios, for example, Bank of Baroda, which had Tier 1 capital of 10 per cent at the end of the March 2011.

Now, one must be wondering where the political inefficiency creeps in from. The Government of India being the largest shareholder, with a 59.4 per cent stake in the bank, is unable to chip in its share of capital in the bank, and hence, has not been able to shore up the bank’s capital. This is hurting the bank in two aspects – the credit growth of the bank, as well as the asset quality that remains vulnerable to any large hit in the quality of loans.

According to some media reports, out of the total Rs 12000 crore required by SBI to reach the correct level of capital adequacy (eight per cent), the government is planning to infuse Rs 3000-4500 crore, depending upon the internal accrual generated by the bank. However, details of how such an infusion will take place are still not clear, as the government has not earmarked any such amount in its budget.

In the case of Dhanlaxmi Bank, there are allegations by one of the employee unions, All India Bank Officers’ Confederation (AIBOC), that the bank had allegedly manipulated accounts, had asset-liability mismatches and was excessively dependent on short-term borrowing. Nevertheless, the management has denied all the allegations – it claims that nothing is wrong in the bank’s accounts and that this is an attempt by AIBOC to malign the bank. Regardless of all the clarifications issued by the management, the share price of the bank is still down by 12 per cent since the day the news broke, compared to the banking index and the Sensex, which are up by one per cent and three per cent respectively. We believe that there is no smoke without fire, and the second quarter FY12 results will reveal the exact financial position of the bank. Till then, we recommend that our readers should stay away from the scrip.

Going back to our cover story on banking (DSIJ issue dated Sept 26-Oct 9, 2011, ‘Time To Shop For Bank Stocks?’), where we had mentioned rising interest rates and their probable impact on the asset quality of banks, which will be more visible in case of PSU banks – this was the reason for our recommendation to investors to stay away from PSU bank stocks in general. We had also said that the RBI will hike interest rates once again in its second quarter review of the monetary policy 2011-12 on October 25, 2011, before taking a pause. The inflation figure has constantly remained above 10 per cent in the last 10 months, which is way above the RBI’s comfort level. Hence, we believe that the RBI will maintain its hawkish stance, and will increase key policy rates by another 25 basis points in its forthcoming second quarter review of the monetary policy 2011-12 on October 25, 2011. Moreover, we believe that worst is still not behind us, and the earlier rate hikes will be reflected in the coming quarterly results. Therefore, we reiterate our earlier view of selected ‘buy’ on banking stocks.

 

Find More Articles on: DSIJ Magazine, Special Report, Research, Articles

news letter

More for the early bird.

Get the post-market reports and breakfast news right in your inbox. See latest »

DSIJ Mindshare

Ducon Infra partners with Sterling & Wilson to bid for large GFD projects

Apurva Joshi / Article rating: 5.0

Ducon Infratechnologies Limited has entered into a strategic tie-up with Sterling & Wilson Private Limited, a flagship group company of Shapoorji Pallonji Group, to jointly bid large-sized FGD tenders. Ducon is an emerging technology company providing solutions in the industrial, infrastructure and digital space to multiple business segments across varied industries.

12345678910Last

Tiger Logistics topline to grow by 10%--buoyant over infra sector status to logistics sector

Tiger Logistics topline to grow by 10%--buoyant over infra sector status to logistics sector

Logistics sector will play a vital role in making the concept of ‘Make in India’ a success. This will be further aided by some of the recent steps taken by Government of India such as granting of infra sector status to logistics sector.

Best and worst Performing Sector Funds of Year 2017

Best and worst Performing Sector Funds of Year 2017

As the year-end has approached most of you are eager to know the mutual fund movers and shakers of the year 2017. Read on to find the performance of various sector dedicated funds.

Markets may start positive, but volatility likely due to F&O expiry

Markets may start positive, but volatility likely due to F&O expiry

The start of the F&O expiry day is likely to be in the green, but volatility may creep in with the progress of the session. The SGX Nifty suggests that the Nifty could open at 10,525 with gains of 32 points at the opening bell. 

Pidilite announces buyback of Rs 500 crore

Pidilite announces buyback of Rs 500 crore

The buyback offer comprises purchase of up to 50,00,000 equity shares. The buyback offer size comprises 0.975 per cent of the total paid-up equity capital of the company.

Bank Nifty drags markets to close in the red

Bank Nifty drags markets to close in the red

The late session fall in Bank Nifty changed the direction of the market, leading to a marginal fall in the benchmark indices. Bank Nifty yet again resisted at its multiple point downward sloping trendline level at 25733.

Six major underperforming MF schemes having higher expense ratios

Six major underperforming MF schemes having higher expense ratios

Mutual funds with a large size of assets under management (AUMs) are supposed to have lower expense ratios. However, there are schemes with large AUMs but having higher expense ratios and generating lower returns. 

Nifty Pharma supports market; Sun Pharma at bullish reversal

Nifty Pharma supports market; Sun Pharma at bullish reversal

Nifty Pharma index has come in as the healer in an otherwise sluggish market. Index has given a consolidation breakout at the 9420 level today and if the it sustains 9420, followed by 9628 on the upside, it has a long way to go.

Ten stocks close to their 52-week low

Ten stocks close to their 52-week low

Following stocks are close to their 52-week low as at 12.35 p.m. on December 27.

Ten stocks close to their 52-week high

Ten stocks close to their 52-week high

The markets on December 27 opened gap down. BSE Sensex is trading at 34,068.15, up by 57.54 points and the Nifty is trading at 10,539.45, up by 7.95 points.

Five stocks with selling interest

Five stocks with selling interest

Overall volumes in futures & options currently stand at 62.75 lakh contracts with a turnover of Rs. 5,19,204.72 crore.