The amendment bill (banking) is a step towards issuing new licenses for banks, but not the final step, says Kotak Institutional Equities update on the banking sector
Kotak Institutional Equities, in its banking sector update, is guarded about the recent excitement surrounding bills placed before the Parliament. The amendment bill (banking) is a step towards issuing new licenses for banks, but not the final step. There are very few positives in the amendments.
However, the changes in the SARFAESI Bill are positive as they increase the strength of banks to initiate recovery of bad loans, says the Kotak update. (SARFAESI stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest).
The Kotak update maintains its cautious outlook as there is no strong RoE (Return on Equity) improvement as slowdown in revenue growth may be accentuated and credit costs are unlikely to decline sharply over FY2013-14. The RoE is estimated to be 14%-15% for public banks and 16%-17% for private banks.
SBI (State Bank of India) and ICICI Bank are the preferred stocks, conclude the analysts of the Kotak update regarding the performance of major players on the banking sector in the stock market.
On the proposed banking sector legislation and its consequences, the Kotak update says that new licenses are to take time; and new instruments will be allowed to raise capital for public banks. The likely delay in passing the bill implies that RBI (Reserve Bank of India) could extend the timeframe to take the next step towards issuing fresh bank licenses. The RBI is looking to have the power to supersede the board and/or inspect books of entities that are not directly supervised.
The amendment bill (banking), according to the Kotak analysts, has some positives, though: (a) Nationalized banks can issue bonus/rights shares, which would be important as investors and regulators can expect a strong capital-raising exercise ($20 billion) over the next few years as banks transition to Basel-III; and (b) increased shareholder voting rights (10% for public banks and proportionate holding for private banks) is a positive as it gives shareholders better representation.
According to the amendment bill (banking), the RBI will be given powers to supersede the board of directors for a period and to appoint an administrator for a period not exceeding 12 months. Currently the RBI has the power to remove a director or any other officer. The RBI will also have the power to seek information, inspect books and returns of associate companies. There will also be increased fines and penalties for violation of the Banking Regulation Act, 1949. Depositor Education and Awareness Fund will have access to deposits that have been unclaimed or non-operative for more than 10 years. Mergers in banks will be exempt from the Competition Commission Act, 2002, as these activities are closely monitored/regulated by the RBI. All these factors are likely to improve the safety of the money brought into the banking sector by many small customers.
SARFAESI (amendment) Bill will put banks in a better position to recover bad loans, according to the Kotak update. The passing of the SARFAESI (amendment) Bill is positive in the current environment. The amendment bill (a) reduces the time at the DRT (Debt Recovery Tribunal) by giving banks a fair representation by filing a caveat before granting any stay and (b) the period to respond to borrowers (after notice) will be extended to 15 days from seven days currently. Time-bound disposal of cases (as mandated in the Act) should improve after the new amendment, says Kotak. Asset reconstruction companies would be allowed to convert the debt (all or part of it) of borrower companies into equity/ shares.
The other bills pending before Parliament include: (1) Insurance: A hike in FDI in the sector to 49% from 26%; (2) Pension Fund: Statutory powers to the interim authority set up earlier; (3) Micro Finance: Development and regulation of these entities; (4) National Housing Bank: Transfer of ownership and increase in RBI’s power (5) SIDBI: Expansion of definition of activities.
Of these bills, Kotak feels that the insurance bill could have a positive impact on the market as it gives an opportunity to select insurance companies to unlock value of their investments.
The Kotak update points out that the banks listed in the stock market are fairly valued at the current levels. It maintains a cautious outlook on select recent developments as broader concerns about asset quality and slow growth persist. Revenue slowdown (less than 15% growth due to slower loan growth and higher margin pressure) will be accentuated in FY2014E and credit costs (1.3% of loans) are unlikely to decline from their peaks.
Apart from restructuring of the SEB (state electricity boards) portfolio, Kotak analysts do not see any large impairment from the infrastructure space, especially loans taken by private companies for power generation. From historically low levels of delinquency, Kotak expects to see higher slippages in the retail portfolio of banks but this would not be a serious cause for concern in the medium term.
NPLs (non-performing loans), which have risen sharply in recent quarters, are likely to remain elevated in the priority sector, predict Kotak analysts. They believe slippages may remain elevated (more than 2.5% over FY2012-14E) as the NPL (non-performing loan) cycle is yet to peak, especially from corporate balance sheets, infrastructure and iron and steel.
The Kotak update maintains the view of there being higher credit costs due to (a) higher slippages (b) improving coverage ratio, which has deteriorated in recent quarters, and (c) dynamic provisions. Implementation of dynamic provisions may result in a situation in which the asset-quality cycle and loan-loss provisioning cycle could be different.
