Markets Spike Upwards

Tue, 26 Apr 01:30 pm

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After opening the day in the red, the Indian indices have recovered and are presently trading on a positive note. Sectoral indices are trading on a positive note with stocks from the auto, banking and metal sectors leading the gains.

The BSE Sensex is trading up 286 points (up 1.1%) and the NSE Nifty is trading up 97 points (up 1.2%). The BSE Mid Cap index and the BSE Small Cap index are also trading in the green, both up by 0.6%. Gold prices, per 10 grams, are trading at Rs 29,119 levels. Silver price, per kilogram is trading at Rs 39,972 levels. Crude oil is trading at Rs 2,870 per barrel. The rupee is trading at 66.63 to the US$.

Stocks in the banking space are trading on a positive note with Canara Bank and Bank of Baroda leading the gains.

Moody's Investors Service has opined that a prolonged worsening in asset quality at PSU banks is the main threat to India's sovereign credit profile.

The firm stated that the main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks. Along with this caution, the firm stated that the capital infusion by the government in PSU banks is likely to be larger than anticipated.

Also, Moody's made a case for the government bearing some of the cost of cleaning up balance sheets.

One shall note that the rising bad loans has been a serious concern for Indian banks, especially for the PSUs. According to RBI's website, the Indian public sector banks account for 72% of total banking sector assets, but they accounted for only 42% in total profits during 2014-15.

The government is doing all it can to bring down the level of these bad loans.

Finance Minister Arun Jaitley earlier this year announced that the government will provide sufficient funds to recapitalise public sector banks (PSUs) to ensure that they play a significant part in boosting growth. The announcement made in the Union Budget 2016-17 was an allocation of Rs 250 billion towards the recapitalization of PSU banks. Apart from this, Rs 100 billion each is going to be infused in 2017-18 and 2018-19 by the government for the recapitalisation of PSU banks. In one of our editions of The 5 Minute Wrap Up Premium we had highlighted what the budget holds for the future of PSU banks (subscription required).

Further, earlier this month the Reserve Bank of India (RBI) stated that it plans to put in place a supervisory enforcement framework wherein action against banks would be taken for non-compliance of RBI instructions. This move was initiated to standardize bad loan recognition across all banks and to put an end to decade-old volatility in banks' earnings. The framework is said to be formalised by June this year.

So it can be said that the government is using its mandate as a great opportunity to unlock the untapped value from its PSU assets. If the government succeeds, then PSU shareholders could multiply their wealth in such stocks. Only time will show what such reforms finally bring.

Stocks in the finance space are also trading on a positive note with Bajaj Finance and Power Finance Corporation witnessing maximum buying interest. In another news update it was reported that Housing Development Finance Corporation (HDFC) is going to raise Rs 5 billion by issuing secured redeemable non-convertible debentures (NCDs) on a private placement basis to cater to housing finance needs.

The object of the issue is to augment the long-term resources of the corporation. It was noted that the proceeds of the issue will be utilised for financing/refinancing the housing finance business requirements of the corporation.

The bonds have April 26, 2021 as the redemption date and will carry a coupon rate of 8.35% per annum. It comes with a tenor of five years.

Last year, HDFC Bank had raised Rs 30 billion by issuing bonds on a private-placement basis. Reportedly, the bank is raising money to enable it to participate in the pickup in credit demand that was expected both from the corporate and the retail sector. The management had earlier stated that the bank will be looking at lending to projects in the infrastructure space which approximately accounts for up to 15% of the bank's book. The banks' interest in raising money via long-term bonds had picked up after the Reserve Bank had made changes in the regulation, announcing that bonds with tenor of more than seven years would be exempted from cash and statutory reserve requirements, if the proceeds were used to fund new long-term infrastructure projects and affordable housing.

Presently the stock of HDFC is trading up by 0.9%.

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