Friday, June 29, 2012
Thursday, June 28, 2012
IT AIN'T OVER YET
The Indian banking system has been plagued with the twin devils of deteriorating asset quality and rise in non performing loans, a trend synonymous with high interest rates and slowdown in the economy. For most part the stress is being faced entirely on the corporate loan book of banks.
CORPORATE LOANS UNDER STRESS
Corporate debt restructuring cases hit record high in 2011-12. Indian banks sought to restructure $12 billion in corporate loans in the fiscal year that ended in March, up 156 percent from a year earlier, according to data from the Corporate Debt Restructuring Cell (CDR). The debt crisis in Indian banking continues, with loans over Rs4,400 crore referred for corporate debt restructuring until May 2012. Mid-cap public sector banks are likely to see the bulk of this. Between April and May, PSBs have referred Rs11,700 crore for CDR. In April 2012, at least 18 cases, accounting for more than Rs7,300 crore were referred for CDR.
BANKS DE-'RISK'ING INTO RETAIL
Some of the large private sector and even PSU banks in an effort to de-tangle themselves from the corporate stress have been increasing exposure to the retail side. Take for instance ICICI Bank where retail forms 35% of the total loan book. A string of defaults in its personal loan and credit card businesses severely damaged its asset quality, forcing a drastic change in its loan book which was three-fourth retail way back in 2008-09. But now the bank is betting big on the retail side again with a target to increase the retail book to 40% of total loan book.
RETAIL BORROWERS TO FEEL THE HEAT ?
The outlook for the economy has got gloomier after the shocking March quarter GDP growth of 5.3%. Industry watchers feel this could hurt demand for retail credit, and even lead to defaults on some of the existing loans. Already, demand for homes and automobiles have been slackening over the last few months.
As corporates in their effort to cut costs start freezing salary hikes and slash jobs it is just a matter of time before in individual borrower starts to feel the heat. As fuel, food, housing and living expenses go through the roof, to what extent would an individual borrower service his debt commitments (in an era of rising interest rates) only time will tell.
** Continuation of series on 'Why its still not the right time to buy bank stocks'
Wednesday, June 27, 2012
STILL NOT THE 'RIGHT' TIME TO BUY BANKS
BANK NPA WORRIES MAY NOT BE OVER
SBI'S GOOGLYThe management of SBI recently met Morgan Stanley and dashed any hopes that investors had of a turnaround in asset quality in FY13. SBI management indicated that gross and net new NPL formation during Q1'FY13 could be at `5000 crore and `3000 crore, respectively. This is higher than the outlook of `4000-4500 crore quarterly slippages run rate and `6000 crore of net new NPL creation in FY13. Management indicated that Q1 credit costs could be around 120 basis points. Restructuring during the quarter could be in the range of `2000-2500 crore.
RATE CYCLE UNLIKELY TO TURNThe Reserve Bank of India in its June mid quarter policy review stated clearly that any further reduction in interest rates hinges on the inflation trajectory. Inflation is likely to inch higher with a deficit monsoon and supply side factors playing spoilsport, it might be a long time before the RBI starts to cut interest rates aggressively.
ASSET QUALITY PRESSURES MAY PERSISTAfter having restructured massive amounts of exposure to the airline, steel, textile and State electricity boards banking sector may be forced to re-assess its exposure to the textile, power and agriculture sector in the coming quarters. This coupled with a decline in GDP growth, slowdown in industrial activity and no signs of a pickup any time soon may compound asset quality issues for most of the sectors including manufacturing.
SBI'S GOOGLYThe management of SBI recently met Morgan Stanley and dashed any hopes that investors had of a turnaround in asset quality in FY13. SBI management indicated that gross and net new NPL formation during Q1'FY13 could be at `5000 crore and `3000 crore, respectively. This is higher than the outlook of `4000-4500 crore quarterly slippages run rate and `6000 crore of net new NPL creation in FY13. Management indicated that Q1 credit costs could be around 120 basis points. Restructuring during the quarter could be in the range of `2000-2500 crore.
RATE CYCLE UNLIKELY TO TURNThe Reserve Bank of India in its June mid quarter policy review stated clearly that any further reduction in interest rates hinges on the inflation trajectory. Inflation is likely to inch higher with a deficit monsoon and supply side factors playing spoilsport, it might be a long time before the RBI starts to cut interest rates aggressively.
ASSET QUALITY PRESSURES MAY PERSISTAfter having restructured massive amounts of exposure to the airline, steel, textile and State electricity boards banking sector may be forced to re-assess its exposure to the textile, power and agriculture sector in the coming quarters. This coupled with a decline in GDP growth, slowdown in industrial activity and no signs of a pickup any time soon may compound asset quality issues for most of the sectors including manufacturing.
Monday, June 25, 2012
RBI'S COSMETIC SURGERY FOR THE AILING ECONOMY
MUCH A 'DO'LLAR ABOUT NOTHING
In its efforts to attract more capital inflows and offer a lifeline to INR, the government and the RBI announced some liberalisation measures that are broadly in line with its infamous track record.
Overall, the measures are positive but perhaps not as significant as markets expected given that those expectations were raised over the weekend by the outgoing finance minister's comments about some major measures. Once again, the government unnecessarily raised expectations only to disappoint.
RBI seems to be taking a more sensible approach while the government appears to be looking for painless quick-fixes that are impractical. The latest set of measures will gradually attract foreign capital but they cannot correct the underlying macro imbalances, such as the unsustainably large twin deficits of fiscal and current account, entrenched inflation and a rapidly depreciating INR.
KEY MEASURES
Boost in external commercial borrowing (ECB) limit to USD10bn. This applies to Indian companies in manufacturing and infrastructure sector that have foreign exchange earnings to borrow overseas for repayment of outstanding INR loans towards capital expenditure and/or fresh INR capital expenditure under the approval route. Note that the overall annual FY13 ECB limit remains unchanged at USD30bn.
Increase in FII limit in local currency G-secs increased by 5bn to USD20bn: The USD5bn increase is for pension/sovereign wealth funds. In order to broad base the non-resident investor base for G-Secs, the RBI has decided to allow long-term investors like sovereign wealth funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of USD20bn.
The lock-in period for infra bonds has been cut to 1year from 3 years.
FIIs can buy bonds with 3-year residual maturity.
NEED FOR TOUGH DECISIONS
There are all sensible moves but may not offer immediate relief for INR, which will also come under pressure to weaken further if USD strengthens. Another aspect to this is to what extent would the FIIs be willing to buy sovereign paper given the sluggishness in the economy and the threat of a rating cut.
India's macro imbalances cannot be fixed by a patchwork of Band-aids or by applying balm. The government needs to facilitate several macro adjustments, but some of which may not be politically palatable. So far, it has been busy treating the symptoms rather than fixing the causes of the macro imbalances.
In its efforts to attract more capital inflows and offer a lifeline to INR, the government and the RBI announced some liberalisation measures that are broadly in line with its infamous track record.
Overall, the measures are positive but perhaps not as significant as markets expected given that those expectations were raised over the weekend by the outgoing finance minister's comments about some major measures. Once again, the government unnecessarily raised expectations only to disappoint.
RBI seems to be taking a more sensible approach while the government appears to be looking for painless quick-fixes that are impractical. The latest set of measures will gradually attract foreign capital but they cannot correct the underlying macro imbalances, such as the unsustainably large twin deficits of fiscal and current account, entrenched inflation and a rapidly depreciating INR.
KEY MEASURES
Boost in external commercial borrowing (ECB) limit to USD10bn. This applies to Indian companies in manufacturing and infrastructure sector that have foreign exchange earnings to borrow overseas for repayment of outstanding INR loans towards capital expenditure and/or fresh INR capital expenditure under the approval route. Note that the overall annual FY13 ECB limit remains unchanged at USD30bn.
Increase in FII limit in local currency G-secs increased by 5bn to USD20bn: The USD5bn increase is for pension/sovereign wealth funds. In order to broad base the non-resident investor base for G-Secs, the RBI has decided to allow long-term investors like sovereign wealth funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of USD20bn.
The lock-in period for infra bonds has been cut to 1year from 3 years.
FIIs can buy bonds with 3-year residual maturity.
NEED FOR TOUGH DECISIONS
There are all sensible moves but may not offer immediate relief for INR, which will also come under pressure to weaken further if USD strengthens. Another aspect to this is to what extent would the FIIs be willing to buy sovereign paper given the sluggishness in the economy and the threat of a rating cut.
India's macro imbalances cannot be fixed by a patchwork of Band-aids or by applying balm. The government needs to facilitate several macro adjustments, but some of which may not be politically palatable. So far, it has been busy treating the symptoms rather than fixing the causes of the macro imbalances.
Thursday, June 21, 2012
SHORT TERM BORROWING COSTS SPIKE
Short-Term Debt: Rates of CDs fall further on surging demand
Rates on certificates of deposit and commercial papers are on the downtrend as demand for these papers is surging as per dealers. "There are a lot of papers maturing now, because of the large number of
issuances that took place in March," according to dealers. As a result of this, mutual funds, the largest buyers of short-term papers are flush with cash. In March 2012, a whopping `93919 crore was raised by banks through the issuance of CDs.
PSU banks have been the most active in the CD market. For instance Indian Overseas Bank was the largest issuer of CDs today, having raised `1000 crore through three-month papers at 9.05%.
Three-month CDs were placed at 9.05-9.20% compared with 9.25-9.40% on Wednesday. One-year CD rates fell to 9.50-9.60% from 9.60-9.70%. "Rates have softened, but it is unlikely that the three-month CD rates will fall below 9% in the near term," said a dealer with a state-owned bank. Rates on commercial papers also declined tracking the fall in CD rates. Three-month CPs were placed at 9.40-9.50% today.
Rates on certificates of deposit and commercial papers are on the downtrend as demand for these papers is surging as per dealers. "There are a lot of papers maturing now, because of the large number of
issuances that took place in March," according to dealers. As a result of this, mutual funds, the largest buyers of short-term papers are flush with cash. In March 2012, a whopping `93919 crore was raised by banks through the issuance of CDs.
PSU banks have been the most active in the CD market. For instance Indian Overseas Bank was the largest issuer of CDs today, having raised `1000 crore through three-month papers at 9.05%.
Three-month CDs were placed at 9.05-9.20% compared with 9.25-9.40% on Wednesday. One-year CD rates fell to 9.50-9.60% from 9.60-9.70%. "Rates have softened, but it is unlikely that the three-month CD rates will fall below 9% in the near term," said a dealer with a state-owned bank. Rates on commercial papers also declined tracking the fall in CD rates. Three-month CPs were placed at 9.40-9.50% today.
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