Of late, a lot.. and i mean a real lot has been written on asset quality woes of PSU banks in India.
I had written a post in June 2015 on some problems, in my assessment, in the banking system (read here: https://www.linkedin.com/pulse/money-lent-spent-sudhir-padiyar?trk=mp-reader-card). The Nifty PSU Bank Index is down ~38% from then, with several public banks losing much more! Some serious fall this is.
The million $ question: With such a severe fall in stock prices, do valuations make sense now?
I suspect more of such issues could crop up in the near future and hence prefer staying away from the temptation of buying into public banks, at the moment. Doesn’t matter how optically attractive they look.
Take a look at the table hereunder. This gives you a snapshot of Non-Food advances (sectoral) of public banks from Fy09 to FY15. The % contribution to total Non-Food advances figure highlights the importance of that sector in the system.
Most sectors (except for ‘personal) have seen advances growth slowing down sharply in FY15 (as compared to its 6 yr CAGR). This slowdown could be deliberate on a/c of the banks themselves restricting incremental exposure to troubled sectors and/or could be systemic on account of reduced working capital requirements by corporates (no pte capex and falling commodity prices).
Some questions that come to my mind (a) which sectors will contribute to the advances growth incrementally? With pte capex showing no sings of picking up, how will we kick start the investment cycle? (b) With sales slowing down, almost across the board, will interest burden start weighing down incrementally on corporates who have managed to survive so far? (c) Advances grew in high double digits from FY09-FY14, in most sectors. Were asset quality issues compromised in a bid to chase growth? (d) to what extent are the assets actually toxic?
The RBI governor seems to be clear in his priorities in cleaning up bank books over credit growth. While this sure is a good step, structurally, over the longer term, the near term could spring more surprises. If banks have just about started recognizing / acknowledging the toxicity of their assets, it remains uncertain how many skeletons could pop out of the closet with incremental (time bound) pressures from the central bank. If this be the case, the denominator (adj book) in P/AB could continue to shrink, making the actual valuation more expensive as compared to the optical valuations they currently trade at.
More importantly, cleaning up books and improving the health of these banks seems to me as a temporary solution. The real solution, IMHO, lies in taking hard decisions and implementing policies that reduce the recurrence of such issues in the future. Some of the well managed, private banks, command premium valuations solely on account of consistent growth and investors being able to sleep peacefully without having to worry on asset quality shocks.
Would appreciate your views.