Kotak Securities says it finds little merit in arguments for a sharp deterioration in the operating environment of the banking sector and believes margins will moderate only marginally from 2Q’s elevated levels
Bank stocks have been falling sharply mainly on two concerns-one is the tight liquidity conditions which could result in pressure on margins; and the second is fears of higher non-performing loans (NPL) due to the exposure to telecom and real estate after the recent scams in both sectors.
The BSE Bankex is down 3% over the past month against the Sensex's 4% gain-underperforming heavily. It is still 13% below its peak in early November.
Kotak debunks both these concerns as overstated. According to the brokerage, "margins for the banking sector have always remained strong in a tighter liquidity environment. Telecom exposure of the banking sector is 2% of loans and real estate is another 3%, with reasonable collateral". Other than this, it believes that loan growth is always a function of the overall GDP growth and "at 8.5-9% real GDP growth, 18-20% growth is unlikely to pose a challenge".
Its main comfort about delinquencies came from discussions with bankers, through which Kotak found that within telecom, larger and more financially robust telecom companies have a very high share of loans and so the chances of these loans going bad are negligible. In real estate, collateral levels are comfortable and over the past couple of years incremental funds have largely gone for residential projects and not for commercial projects. In fact, for some banks such as Bank of India (BoI), Canara Bank, Indian Bank, State Bank of India (SBI), Axis Bank, Federal Bank, HDFC Bank, and ICICI Bank, it expects overall lower gross NPLs in FY12.
It recommends banks with high CASA (the current account to savings account ratio) such as SBI, Punjab National Bank (PNB), Bank of Baroda (BoB), ICICI Bank and Axis Bank. While the report concedes that there might be some lag in the hike in lending rates catching up with deposit rates, it feels that "pricing power remains with banks, resulting in higher lending rates as well". However, in the meantime, a high CASA bank has a natural advantage as its deposit costs do not rise as much as some of the wholesale focused banks.
Kotak points out that while net interest margins (NIMs) of banks have improved hugely over a year-Andhra Bank's has gone up from 3.1% to 3.9%, SBI's from 2.6% to 3.4%, Federal Bank's from 3.7% to 4.4%--it does assume a decline in FY12, but only slightly. In fact, ICICI's NIMs will probably improve in FY12.
Deposit and CASA growth has been healthy for most banks-Andhra Bank 26% and 30% in 2Q FY11, BoB at 30% and 36%, BoI 21% and 28%, Canara Bank at 22% and 29%, Corporation Bank at 20% and 25%, Indian Bank at 20% and 32%, Union Bank of India at 30% and 33%, Axis Bank at 36% and 41%, HDFC Bank at 30% and 51% (the highest), ICICI Bank at 13% (from negative growth) and 44%, and Yes Bank at 107% and 10%. Some of the laggards, especially in terms of deposit growth, have been Federal Bank at 8% and 29%, Indian Overseas Bank at 8% and 33%, Oriental Bank of Commerce at 16% and 25%, PNB at 18% and 41%, and SBI at 11% and 48% (the last two due to a higher base).
Kotak believes that there is likely to be margin pressure on non-banking finance companies (NBFCs). In FY10, surplus liquidity led to falling bulk borrowing rates and most NBFCs made hay with high margins. However, with the recent sharp hike in these rates, margins may come under pressure.
"Housing finance companies have now (December 2010) raised home loan rates for new customers by 50-75 bps, this will likely support near-term margins though such a rise will impact volumes over the longer-term." Note that SBI will review its teaser rate home loan scheme in January 2011.
Auto finance companies will pass on rate hikes, feels Kotak, while for infrastructure finance companies, margins are at a peak.
2010 will go down as the ‘Year of the Corrupt’. Looking back, it’s difficult to step out of the muck of scams, to hope for a cleaner year ahead. But hope we must
The Bofors scam and Harshad Mehta are long forgotten, but 2010 will go down as a year that redefined the word 'scam' by displaying the many fields and ways in which they can occur.
The year started with the Sukna land scam, leading to disciplinary action against the top army brass. Army chief General Deepak Kapoor ordered court-martial proceedings against his close aide and military secretary Lieutenant General Avadhesh Prakash, the senior-most of the four generals indicted in the alleged scam case. The case involved the issuance of a no- objection certificate by the commander of the Army's 33 Corps to real estate developer Dilip Agarwal, for the transfer of a 71-acre tea estate adjacent to the Sukna military station, on the pretext of opening an educational campus affiliated to Ajmer-based Mayo College.
In February, IT major Wipro Technologies detected embezzlement of company funds by an employee in its finance department. The fraud is estimated at $4 million.
In April, Shashi Tharoor, resigned as minister of state for external affairs over the Kochi franchise in the Indian Premier League (IPL). The problem started after Lalit Modi, the then IPL commissioner, revealed that Mr Tharoor's friend Sunanda Pushkar had an equity stake in Rendezvous Sports World (RSW) which won the Kochi bid. It was later disclosed that Ms Pushkar got sweat equity of the value of Rs70 crore from Rendezvous. But the focus soon shifted to Mr Modi for alleged fraud, tax evasion and more, with allegations and counter-allegations flying about through the media.
In the North-East, a special investigative cell in Arunachal Pradesh arrested Gegong Apang on charges of a multi-crore public distribution scam that happened before 2004, when Mr Apang was chief minister. The public exchequer suffered losses as fraudulent hill transport subsidy bills were cleared without financial concurrence.
In June, the microfinance sector was plunged into turmoil. Ironically it was the country's leading microfinance company, SKS Microfinance, that triggered the crisis with the controversial sacking of its chief executive officer within weeks of a very successful initial public offer. While the dismissal exposed the high-pay-high-interest operations of micro lenders, the Andhra Pradesh government soon issued an ordinance forcing strict rules and a cap on their activities. At the year-end the ordinance became statute. The sector shows no signs of recovery and is reeling from defaults and absence of fresh funding.
In July, the illegal mining scam rocked the BJP-led Karnataka legislature. Governor HR Bhardwaj asked for the resignation of the Reddy brothers, who are ministers in the Karnataka government, accusing them of illegal mining. The opposition sought the resignation of chief minister BS Yeddyurappa, but he refused to quit. The illegal mining and export of iron ore in Karnataka is estimated at Rs60,000 crore.
In August, an Uttar Pradesh government official disclosed that the Rs300 pension, which is part of the government's social security programme was fraudulently disbursed. The official revealed that of the 86,035 registered old-age pensioners in the state, only 65,920 people were genuine, while 17,419 were either fake or ineligible and 2,441 dead people were being paid a pension. An investigation has been ordered.
In September, the collapse of a footbridge, incomplete and shoddy construction work and filthy accommodation for sportspersons participating in the Commonwealth Games set off an uproar over misuse and misappropriation of money spent on this international event.
Media investigations revealed that money was siphoned off through allocation of broadcast rights, payments were made to non-existent parties, wilful delays in execution of contracts, over-inflated prices and disorganised purchase of equipment. The Central Vigilance Commission probing the alleged corruption in expenditure over the Games has recorded misappropriation amounting to an estimated Rs8,000 crore. The Central Bureau of Investigation (CBI) has raided the offices of Suresh Kalmadi and other Games officials, but Mr Kalmadi continues to be the chairman of the Games organising committee.
In Maharashtra, the Adarsh Housing Society land grab cost chief minister Ashok Chavan his job. The Adarsh building project, in Mumbai's Colaba area, originally cleared as a six-storey structure for Kargil war heroes and widows, was converted into a 31-storey building, in which flats were allocated to top army officials, bureaucrats and politicians or their close family members. Inquiries by the media and RTI activists have also found that clearances for the building, constructed on prime defence land, have also been given illegally.
Karnataka chief minister Mr Yeddyurappa was again targeted over land transfer deals favouring his sons. The lands, which were part of the discretionary quota of the chief minister, were earlier earmarked for public projects and industries.
Even as the Adarsh and Karnataka land scams held the attention of the public, another major corruption case came to light with the arrest of eight finance executives, including the chief executive officer of LIC Housing Finance, Ramachandran Nair. The officials were accused of sanctioning loans to corporate houses (many of them real estate businesses), overlooking the guidelines, in exchange for bribes. The deals were worked out by Money Matters, a hitherto little known Mumbai-based company.
But it was the 2G spectrum allocation scam that created the biggest storm, disrupting the entire winter session of parliament. In November, the Comptroller and Auditor General (CAG), the country's topmost accounts head, reported irregularities in the government's allocation of 2G spectrum to private companies that resulted in a loss of nearly Rs1,76,000 crore in potential revenues.
The CAG report held telecom minister A Raja responsible for arbitrary and unfair allocation of spectrum in 2008 at the rates in 2001, ignoring the guidelines of the telecom ministry and the advice of the prime minister. Raja resigned, but more disclosures about lobbying over ministerial positions by some industry leaders and involving popular media personalities widened the matter and ensured it will not die down easily.
The opposition has been firm on its demand for an investigation into the matter by a Joint Parliamentary Committee (JPC), but the government has so far refused to give in to the demand, saying that it is being investigated by the Public Accounts Committee (PAC). The opposition is adamant that only a JPC can look into the aspect of the accountability of the government that is at the core of the scam.
A lot of the disclosures on this matter were contained in taped conversations of Niira Radia, corporate lobbyist and public relations consultant for top business houses like the Tatas and Reliance Industries, by the income-tax authorities. The conversations reveal how she manipulated the media over issues concerning the Ambanis and the even the appointment of A Raja as telecom minister in the current government instead of Dayanidhi Maran.
Extensive transcripts of the tapes were published in Outlook and Open newsmagazines and the tapes of nearly 5,000 conversations are now in the custody of the Supreme Court, which is keeping a close check on the ongoing investigations into the entire matter dating back to 2001.
In the last few days, we learned about a customer relationship manager at the Citibank branch in Gurgaon duping high networth individuals to the tune of nearly Rs400 crore.
The investigation into most of these cases is still going on and will likely dominate the new year 2011.