Companies & Sectors
Kotak cautious on banking sector; expects stress to remain high

Kotak Institutional Equities expects revenues of banks to slow down amidst higher credit costs due to an increase in repo rates 

Kotak Insitutional Equities (Kotak) has released a report stating that the banking sector continues to face pressure and stress due to loans going sour despite fairly positive first quarter results. It has maintained a cautious outlook. It said, “(banks) have reported strong earnings growth at 37% y-o-y (21% ex-SBI) on the back of healthy revenue growth of 16% y-o-y and lower provisions (9% y-o-y decline) despite non performing loans (NPL) rising sharply.” However, it expects revenue to slow down amidst higher credit costs due to an increase in repo rates. The investment bank suggests investors pick up State Bank of India (SBI), ICICI Bank and Federal Bank, while it prefers Mahindra & Mahindra Financial Services, Shriram City Union Finance and IDFC in the non-banking financial space. 
According to Kotak report, “1QFY13 was dismal across banks with gross NPL increasing sharply by 14% q-o-q (primarily from SBI) to 3.1% of loans. Net NPL increased 20% q-o-q to 1.4% of loans. Slippages were high at 3% with slippages steadily moving from mid-corporate/SME segment to retail and agriculture.” SBI saw the most slippage (5%), followed by Punjab National Bank (4.3%), Union Bank (3.6%), Andhra Bank (3.9%), Bank of India (2.8%), Canara Bank (2.6%), to name the top few.
Public sector banks have borne the most of the brunt, having restructured 9% of their total loans. The worse affected are Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce and Punjab National Bank, with restructured loans touching double digits. SBI’s restructured total loans stood at 6.9%. On the other hand, private sector banks hardly restructured their loans—HDFC Bank (0.5%), Axis Bank (2.3%) and ICICI Bank (2.3%). Refer to our cover story on PSU banks (
What must be noted is the root causes for these slippages—poor performance of the aviation sector and massive defaults by state electricity boards. “We note that SEB/aviation restructuring accounts for 34% of the total restructured loan portfolio of banks and nearly 50% of the overall SEB exposure has been restructured,” the report said. 
According to the report, public sector banks are trading at less than their book values, at 0.8x price-book ratio. This may be cheap, but it is cheap for the very reason that public sector banks are badly run and badly need reforms.
Another factor is that infrastructure loans have slowed down quite a bit since 2009, as the government has stymied reforms amidst corruption. According to the report, its growth rate in 2009 was 31.6% while today it is 13.2%. Despite this, loan growth has been fairly stable over the last few quarters and stood at 18%-20% levels. Private sector bank loans grew over 23% (the highest in last four quarters) while public sector bank showed 18.7% loan growth (which is down from 21.7% from the corresponding quarter last year). 
On the consumer side, deposit growth continues to lag credit growth and is currently below 14%. This is due to the fact that consumers are shying away from fixed deposits which are currently getting eaten up by inflation. With the exception of SBI and private banks, other banks have shown a decline in deposit growth, indicating their inability to attract customers. 
The entire industry is going through a tough time with short-term rates still remaining high and liquidity well below comfortable levels. According to Kotak, loan growth in the previous quarters were funded by expensive deposits resulted which in turn led to the rise in cost of funds in the first quarter of 2013 fiscal. This resulted in the erosion of net interest margins. However, the investment bank expects cost of funds to decline.
The only glimmer of hope is the performance of non-banking financial companies (NBFC) which have performed somewhat better than expected but future is also uncertain. According to the report, “NBFCs’ 1QFY13 performance was broadly in line with expectations: (1) y-o-y growth was high at 25%-30% for most players, (2) NIM improved y-o-y for most players (post interest rate hikes in 3QFY11, NIM were suppressed in 1QFY12) and (3) NPLs inched up q-o-q during the quarter.”


Upmove may continue: Wednesday Closing Report

Cautious upmove ahead; change in trend if the Nifty closes below the previous day’s low


The market snapped its two-day winning streak to close lower on unsupportive global cues and the political stand-off in Parliament. The two-day strike by PSU bank employees also weighed on the sentiments. Yesterday we had mentioned that an upward trend may be sustained if the Nifty remains above the previous day’s low. We continue to maintain that stand. The National Stock Exchange (NSE) saw a slightly higher volume of 52.47 crore shares.


The market opened lower on weak global cues and the political logjam at the Centre. Markets in Asia were down in morning trade on a steep 8.1% plunge in Japanese exports in July. The Nifty opened 25 points lower at 5,396 and the Sensex started off at 17,827, a cut of 58 points from its previous close.


The indices fell to their intraday lows in initial trade with the Nifty going down to 5,395 and the Sensex slipping to 17,800. A weak attempt to emerge into the positive around 10.30 am was met by resistance from sellers, pushing the benchmarks lower again.


Employees of public sector banks in India have gone on two-day nationwide strike on Wednesday opposing banking sector reforms and outsourcing of non-core activities, affecting operations. They are protesting against banking sector reforms and unilateral implementation of the Khandelwal committee report on human resources management in PSU banks. However, several private sector banks, foreign banks and ATMs continued to operate normally.


Select buying lifted the indices into the green in the post-noon session. The gains enabled the market hit its intraday high around 2.30pm. At this point, the Nifty rose to 5,433 and the Sensex climbed to 17,912.


However, selling pressure in late trade saw the indices dip into the negative once again. The market snapped its two-day winning streak and closed in the red on unsupportive global cues and the stand-off in Parliament for the second day following the CAG report that was released last week. The Nifty closed eight points lower at 5,413 and the Sensex finished the trade at 17,847, down 38 points.


The advance-decline ratio on the NSE was in negative at 675:756.


In line with a negative close of the Sensex, the broader indices also settled with similar losses. The BSE Mid-cap index fell 0.21% and the BSE Small-cap index declined 0.22%.


The sectoral gainers were BSE Healthcare (up 0.38%); BSE Auto (up 0.24%); BSE IT (up 0.14%); BSE PSU (up 0.12%) and BSE Bankex (up 0.04%). The top losers were BSE Realty (down 0.97%); BSE Power (down 0.82%); BSE TECk (down 0.42%); BSE Capital Goods (down 0.41%) and BSE Consumer Durables (down 0.30%).


The leaders in the Sensex list were Dr Reddy’s Laboratories (up 1.05%); Coal India (up 0.94%); Infosys (up 0.93%); Bajaj Auto (up 0.86%) and Hero MotoCorp (up 0.85%). The key losers were Bharti Airtel (down 3.85%); NTPC, Sterlite Industries (down 1.32% each); GAIL India (down 1.04%) and Reliance Industries (down 0.90%).


The top two A Group gainers on the BSE were—Indian Hotels (up 4.52%) and Atstrazeneca Pharma India (up 4.25%).

The top two A Group losers on the BSE were—Opto Circuits (down 6.39%) and TTK Prestige (down 4.94%).


The top two B Group gainers on the BSE were—AGC Networks (up 19.99%) and IL&FS Engineering and Construction (up 19.96%).

The top two B Group losers on the BSE were—Plethico Pharmaceuticals (down 20%) and Mahavir Impex (down 16.22%).


The key performers on the Nifty were Ranbaxy Laboratories (up 4.28%); BPCL (up 2.67%); Bank of Baroda (up 1.52%); Infosys (up 1.27%) and Dr Reddy’s Laboratories (up 1.05%). The main laggards were Bharti Airtel (down 3.98%); IDFC (down 1.73%); Sesa Goa (down 1.68%); NTPC (down 1.58%) and Sterlite Ind (down 1.49%).


Markets in Asia closed lower on weak exports data from Japan on lower demand, mainly from Europe on account of the lingering debt crisis. Exports slumped 8.1% year-on-year in July, the most in six months. The Japanese data follows a similar weakening exports trend from Taiwan, South Korea and China.


The Shanghai Composite declined 0.50%; the Hang Seng dropped 1.06%; the Nikkei 225 fell 0.27%; the Straits Times retreated by 0.53%; the Seoul Composite slipped by 0.41% and the Taiwan Weighted lost 0.14%. Bucking the trend, the KLSE Composite rose 0.15%.


At the time of writing, CAC 40 of France was down 0.50%, DAX of Germany was down 0.73% and UK’s FTSE 100 was trading 1% lower and the US stock futures were trading in the red.


Back home, foreign institutional investors were net buyers of shares totalling Rs141.37 crore on Monday whereas domestic institutional investors were net sellers of equities amounting to Rs141.64 crore.


Pharma major Venus Remedies today launched a new drug Trois for treatment of arthritis. The drug would provide relief from all kinds of arthritic pains, company's joint managing director and director (research) Manu Chaudhary said in a statement. The stock rose 0.28% to settle at Rs212.10 on the NSE.


Alstom India today said it has bagged a Rs700 crore contract, to be implemented along with state-owned BHEL, for supplying power equipment for Nuclear Power Corporation’s plant at Rawatbhata in Rajasthan. The stock gained 0.92% to close at Rs385.15 on the NSE.


Panasonic India has selected Four Soft for automating its warehousing operations in India. Four Soft, the Hyderabad-based provider of IT solutions for the logistics industry, will deploy 4Selog across 28 warehouses of Panasonic India, the company informed the Bombay Stock Exchange on Wednesday. Four Soft closed at Rs8.10 on the NSE, up 4.52% over its previous close.


Taxes worth Rs58,636 crore locked up in litigation in SC, HCs

The main reason for non-realisation of unrecovered dues include pendency of decision on stay applications by Appellate Authorities, arrear recovery stayed by various Appellate Authorities and Courts, the minister said

New Delhi: Taxes worth Rs58,636 crore are locked up in litigations in the Supreme Court and different High Courts, the government said on Wednesday, reports PTI.
On the Direct Taxes sides, 5,860 cases involved tax demand worth Rs2,707 crore were locked up in Supreme Court. Another 29,650 cases with tax demand of Rs36,340 crore were pending in High Courts.
The information was provided by Minister of State for Finance SS Palanimanickam in a written reply to the Lok Sabha.
As for indirect taxes, 2,855 cases involving Rs8,130 crore were pending with the Supreme Court and 14,626 cases amounting to Rs11,459 crore were lying in different High Courts, he said.
The Minister said that non-recovery of tax dues is mainly attributable to unavoidable processes in law including appellate remedies.
The main reason for non-realisation of unrecovered dues include pendency of decision on stay applications by Appellate Authorities, arrear recovery stayed by various Appellate Authorities and Courts.
In another reply, he said the Income Tax department will not reopen cases where tax assessment proceedings had been finalised and no notice has been sent before 1 April 2012.
Following retrospective amendment to the I-T Act, there were apprehensions in certain sections that the government may reopen the old cases.


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