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Assorted Indian banks at Rs 151.2 per share; any takers?

It is not just the state-run banks are at their nadir, the state of private lenders is no different.

, ET Bureau|
Last Updated: May 22, 2020, 08.01 AM IST
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Bank
The usual corporate versus retail differentiation that saved some lenders in the past may not be of much help this time as defaults could be across the board.
A popular WhatsApp forward doing the rounds among investors since Tuesday evening is Bank ki Thali (meal of bank shares) only at Rs. 151.2, reflecting the frustrations over eroding value.

The combo includes Bank of Baroda (Rs. 37.70) + Punjab National Bank (Rs. 27) + Yes Bank (Rs. 27.55) + IDFC Bank (Rs. 19.65) + Federal Bank (Rs. 39.30) = Rs. 151.2. Many of them are less than a tenth of their peak value a few years ago.

The combined market value of these banks is at Rs. 93,000 crores and the asset size of Bank of Baroda alone is at Rs. 10.93 lakh crores. The divergence is the distrust between the value of assets on banks’ books and investor perception.

It is not just the state-run banks are at their nadir, the state of private lenders is no different. Axis Bank, IndusInd Bank and HDFC Bank are trading at a price-to-book of where they were during the Global Financial Crisis, data from Motilal Oswal Securities shows. ICICI Bank and Kotak Mahindra are better off. State Bank of India is at 0.3 compared with 0.9 after Lehman Brothers blew up.

Indian banking which was just coming out of the bad loans rubble of the 2009-13 growth binge just got a body blow due to coronavirus lockdown that led to the Reserve Bank of India declaring a moratorium on payments for three months. This time round, it was not reckless underwriting that threatens to singe banks, but an act of God.

The usual corporate versus retail differentiation that saved some lenders in the past may not be of much help this time as defaults could be across the board. The bad loans could spike to 11.5 percent this fiscal from 9.5 percent last year, estimates Crisil.

"Even before Covid-19, beyond the smokescreens, the true Gross Non-Performing Assets across banks and NBFCs probably stood at 12% of the INR 140 lakh crores of advances," says Ananth Narayan, professor of finance at SPJIMR. "Covid-19 could well push this to 20% of advances. This fear is reflected in the current state of savings, lending and credit markets."

As both the private and public sector banks get pummeled by bad loans and sliding stock prices, questions arise about financial stability. While the government and the RBI have ensured depositors did not lose money, depositor panic is very much alive, especially at private lenders whenever doubts arise about their strength.

As worries about Yes Bank’s books began to mount, depositors fled with it losing nearly 36 percent in just one quarter forcing the Reserve Bank of India to impose a moratorium. Depositors turned edgy leaving other private sector banks too with IndusInd seeing a tenth of deposits leaving in just a month. So was the case with RBL Bank, though these were due to hasty decisions by state governments to pull out funds after Yes Bank moratorium.

"The Yes Bank event undermines depositor confidence in private sector banks, whereas public trust in PSBs will remain strong, underpinned by a perception of strong government protection for them," said Moody’s a rating company after Yes Bank bailout. "As a result, some private sector banks, particularly, small institutions could lose deposits to PSBs, which will weaken their funding profiles."

Events would unfold once payments moratorium ends on May. 31. While attempts are afoot to kick the can down the road by opting for loans restructuring that led to a build-up in bad loans prior to 2015, investors and depositors would see through the game.

Many of the private sector banks are well capitalized and run far more efficiently than state-run banks. Their credit underwriting standards are probably the best and they don’t engage much in financial engineering unlike in the West, thanks to regulatory conservatism. But when there's panic nothing other less than a sovereign guarantee helps.

Banks will be tested on the quality of assets and that would determine valuations. What if they have to keep raising capital for survival and provide for dud loans like the way Wall Street did?

Citibank that was trading at more than $300 apiece before 2008 is at $44, show data from macrotrends.net. Royal Bank of Scotland, which traded at more than 3,000 pence, is at 103. UBS, which was above 50 Swiss Francs, is at 9.50.

Closer home, SBI’s share price is lower than where it was prior to the Global Financial Crisis.
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