It has been a momentous FY03 for the banking sector both in terms of structural changes as well as its performance on the stocks markets. The parliament passed the ’Securitisation and Reconstruction of financial assets and Enforcement of Security Interest Act 2002’. This new law gives sweeping powers to the lenders over borrowers in order to recover their dues. The law allows banks to take over the assets of the defaulting borrowers and to either dispose them off or hand it over to an asset reconstruction company in order to recover their dues.
The year also saw interest rates falling further as the RBI maintained its proactive initiative to maintain a soft interest rate scenario. The central bank took measures to further reduce the bank rate (the rate at which RBI lends to commercial banks) to 6.25% from the earlier 6.5%. The Cash Reserve Ratio too was reduced to 4.75% from 5% in October 2002. These steps contributed towards increasing the liquidity in the market. Higher remittances as well as a lackluster credit off take from the industrial sector in India led to ample liquidity in the system, thus indirectly contributing to the maintenance of the soft interest rate regime.
Softer interest rate bias as well as increased liquidity helped grow the banks’ credit by 17.3% in the current financial year up to January 10th 2003, compared to 11.0% in the same period last year. What was disturbing however, is the fact that food credit showed a de-growth of 7.1% till January 10th 2003 compared to a 33% growth in the same period last year. This results in the fall of food credit as a percentage of total credit to 7.2% compared to 9.4% in the same period last year.
Non-food credit growth was 19.7% in the period up to January 10th 2003 compared to 9.1% in the same period last year. Not accounting for the merger (ICICI Bank with ICICI) this growth was lower at 11.4%. Though the growth figure was higher than previous year, it still continues to be a cause for concern. This is because of the fact that a significant part of the incremental non-food credit off take has been due to banks lending to the retail sector. While the break up is not available there is a possibility that credit off take from the industry is likely to have been sluggish.
Top 5 gainers
|Bank of Baroda
|Indian Overseas Bank
Banking stocks had a good FY03, which is apparent from the table above. The top 5 gainers among banking stocks in FY03 were nationalized or public sector banks. The passing of the securitisation ordinance was largely the reason for attracting investor attention towards these banks. Nationalized banks have a history of high non-performing assets and the new law is expected to go a long way in improving the asset quality of these banks. There have already been instances of banks taking over the assets of defaulting lenders and meeting with some success in disposing the same to realise their dues.
Another reason for the buoyancy towards these nationalized banks was their huge portfolio of government securities. In a falling interest rate scenario these banks have been able to book significant amount of gains reflecting directly on the net profits even after aggressively increasing provisioning for NPAs. Further the central government has announced a buyback of non-liquid government securities held by these banks. This will help these banks to book more profits that can be effectively used to increase the provisioning for NPAs.
Top 5 losers
|Global Trust Bank
Among the top five losers in this sector, private banks were the only contenders. IDBI Bank despite its good performance in the first nine months of FY03 has lost significantly on the bourses mainly due to concerns that its parent (IDBI) may initiate steps to merge it with itself. IDBI has a significant amount of NPAs in its books and if merged with IDBI Bank, it will result in lower valuations for the combined entity due to IDBI’s legacy. Banks like Centurion Bank, IndusInd Bank and Global Trust Bank are not doing well financially and hence the bearish attitude towards these counters.
Going forward what investors have to realise is the fact that the gains banks have made in FY03 with respect to their government securities portfolio may not be seen in FY04. This is due to the fact that the sharp fall in interest rates observed in FY02 and FY03 is unlikely to be seen in FY04. Consequently, the robust growth rates banks saw in their earnings mainly due to portfolio gains may not come in FY04. Also the incremental investments of banks will be at lower interest rates, thus reducing the interest income from investments in FY04. Considering all these factors FY04 may be relatively subdued as far as the financial performance of banks is concerned.
As far as the long term prospects of the banking sector are concerned, structural changes and lower interest rates are likely to bring about a change in the nature of the banking sector in India. Lower interest rates are likely to encourage Indians to consume by taking credit. Its effect can already be seen in the robust growth in retail credit off take in FY03. We believe that growth in retail credit off take is still at a nascent stage and has the ability to grow strongly in the future too. The consumption boom, in turn is likely to fuel a revival in the industrial credit off take. As the industrial sector revives, the fortunes of the banking sector too will be further enhanced in the long term.