Banking Stocks Out of Favour

Tue, 23 Feb 01:30 pm

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Following a negative trend since the opening of the trading day, the Indian indices continued to remain under pressure in the post noon trading session. Sectoral indices are trading on a negative note with stocks from the banking, realty and finance sectors bearing the maximum brunt.

The BSE Sensex is trading lower by 332 (down 1.4%) and the NSE Nifty is trading down by 111 points (down 1.6%). The BSE Mid Cap and the BSE Small Cap indices are also trading in the red, both down by 1.3%. Gold prices, per 10 grams, are trading at Rs 29,242 levels. Silver price, per kilogram, is trading at Rs 37,235 levels. Crude oil is trading at Rs 2,272 per barrel. The rupee is trading at 68.67 to the US$.

Stocks in the power space are trading on a negative note with GVK Power & Infra and JSW Energy leading the losses. As per a leading financial daily, Bihar has signed a memorandum of understanding (MoU) with the Central government under the Ujjwal Discom Assurance Yojana (UDAY). This marks as the sixth state and second with a non-BJP government after Uttar Pradesh to do so.

Under the scheme, Bihar government would take over 75% or Rs 23 billion of the states discom's debt of Rs 31 billion as of September 2015. The balance Rs 8 billion outstanding will be re-priced or issued as state guaranteed discom bonds at coupon rates of around 3% less than the average existing interest rate.

The debt restructuring will lead to annual saving in interest cost to the tune of around Rs 1.2 billion. Also, the scheme is expected to help Bihar speedily provide power to around 1,152 villages and 16 million households that are still without electricity.

The UDAY scheme was brought up by the government to bring a turnaround in the State Electricity Boards (SEBs) that have been caught up in a vicious cycle of high debt and operational losses. The scheme allows power distribution companies (discoms) in select states to convert their debt into state bonds. Further, the part of debt not taken over shall be converted by banks into bonds with a cap on the interest rates.

So far, states with financially sound power distribution companies and undivided electricity departments have lined up to be part of this scheme. The drive behind joining the UDAY scheme for these states is incentives like concessional coal, power and finance, which reduce their costs. Other states that have become a part of the scheme are Rajasthan, Chhattisgarh, Jharkhand and Gujarat.

The above rescue package for discoms bodes well for health of SEBs. By looking at the above developments and interest shown by various states, the scheme can have said to be gotten successful response. Having said that, one shall watch out further steps that government takes to make the scheme successful.

Banking stocks are trading on a negative note with ICICI Bank and IDFC Bank witnessing maximum selling pressure. As per a leading economic daily, ICICI Bank, the country's largest private sector bank, has taken over around 275 acres of land parcel from Jaiprakash Associates (JAL). The value of this land parcel is estimated to be worth Rs 15-18 billion.

The transaction will help reduce the bank's exposure to the company and also lessen JAL's debt servicing obligation to a more manageable level. The bank's total exposure to the company was Rs 66 billion at the end of March 2015.

Of the total 275 acres that ICICI Bank has acquired, 250 acres are on the Yamuna Expressway, while 20 acres are in the Jaypee Sports City in Greater Noida. The remaining 4-5 acres are in the prime Jaypee Wish Town on the Noida-Greater Noida Expressway.

Many Indian banks today have accelerated exposures to sensitive sectors of the economy such as real estate and capital markets. Moreover, the problem has got worse as many of the companies in these sectors are unable to repay their debts. This has meant more bad loans for Indian banks. And the provisioning for these bad loans have hit their profitability. All of these concerns have kept the banks in dire need of capital to meet not just incremental credit demand but also Basel-III norms. As a result, banks are being aggressive in their recovery and borrowers are having little choice but to monetize their assets.

ICICI Bank is India's largest private sector bank. During the third quarter ended December 31, 2015, the bank has reported 13% YoY growth in net interest income and 4.5% YoY growth in net profits for 3QFY16. Here is our analysis of the results (subscription required). Presently the stock of ICICI Bank is trading down by 3%.

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