Monday, January 23, 2012

>How are Indian banks compared with global banks on ROA parameter...

2010 and 2011 has been a difficult period for the global banking system, with challenges arising from the global financial system, eurozone trouble as well as the emerging fiscal and economic growth scenarios across countries. The Global Financial Stability Report in
September 2011 has cautioned that for the first time since October 2008, the risks to global financial stability have increased, signalling a partial reversal in the progress made over the past three years. The table below may indicate India in a better position compared to
advanced nations on ROA basis but the prudent policies of RBI may be insufficient to protect bank’s financial health in the coming fiscal year.

Have bank stocks bottomed out?

What happened over the past year.…
The Bank Nifty (index covering banking stocks) is at its lowest in last 18 months. Bank Nifty Index was quoting at 11,483.7 in the beginning of FY12. It has fallen 23% to 8,839.7 while the broader market has fallen just 15%. Performance of PSU sector banks was even worse and the CNX PSU Index fell nearly 35% in the last ten months. Stock such as IDBI Bank, Union Bank and SBI has plummeted 38.9%, 41.5% and 37.5% respectively in the last 10 months. Others like Axis Bank, ICICI Bank have plunged 27.4% and 30% during the same period.

The reasons besides the weak macro-economic have been low capital adequacy, high interest rates and fear of increasing NPAs. Banking shares were also under pressure after global credit rating agency Moody’s Investor Service cut the standalone rating of India’s largest public sector bank, SBI in October 2011 due to concerns over capital and rapid deterioration in asset quality. The agency cut its rating on SBI’s financial strength to D+ from C- and lowered its hybrid debt rating on the bank to Ba3 from Ba2, following the reduction in financial strength rating. 

The repo rate, the rate at which banks borrow from the RBI for short duration, was increased by 375 bps between March 2010 and September 2011 to control inflation. In this rising interest rate scenario, the net interest margin (NIM) of nationalised banks, which account for 74% of the assets of the banking system, increased from 2.63 % in March 2010 to 3.2 % in March 2011. However, in the period between March and June 2011 when interest rates have continued to rise, the NIMs of nationalised banks shrunk to 2.9%.

Could this be the right time to enter into banking stocks or are there any downside risks left
With Bank Nifty at 2-year lows leaves a possibility of strong recovery in the near future. The outcomes deduced in the current scenario are that the worst is over for most banking stocks and its time to buy. The main points being spoken are: The worst of inflation pressure is over, interest rates have peaked and stock prices have reached value zone and in some cases are at historic low. While prima facie, all of them look valid arguments, the current scenario is looking a bit like 2008, when we had the big inflation scare led by crude’s surge towards $140/bbl. The subprime crisis peaked in September 2008 following the collapse of Lehman Brothers. The global financial crisis which began in the fall of 2007 and progressively worsened in 2008, affected the Indian financial sector from 2008. The PBV of BSE Bankex fell from 3.99x on 14/11/2008 to 0.97x on 9/3/2009. It later moved up to 3.41x on 5/11/2010 and currently is at 1.84x.

To read the full report: BANKING SECTOR REVIEW