The advancing monsoon has brought cheer to stock indices, with both Nifty and BSE witnessing a surge in the money invested on Indian stocks. But, despite that, the troubles of the banking sector continue to plague investor sentiments. For the past few months, global attention has turned to India’s overstressed banks.
And rightly so. A banking system overburdened with bad loans and upset by sloppy management of such loans, poor technology, and the absence of due diligence in assessing lending viability, should be a worry. The International Monetary Fund has issued warnings about the health of Indian banks. Even the Reserve Bank of India’s own assessments have revealed their vulnerability.
The Modi government, too, has reacted in a manner typical of the last few governments, which took the path of writing off bad loans and paying for the banks’ sins. “This year, the Union budget proved to be a dampener for banking,” said Subhada Rao, senior president and chief economist, Yes Bank. “That, too, at a time when public sector banks were relying on a higher bank recapitalisation figure from the government.”
It was, in a way, a year of reckoning and reconciling for Indian banks—both public and private. Despite the gloom in the banking sector, stock markets have witnessed bank stocks recover from their historic lows just a few months ago.
The stocks, in fact, had started climbing even before the arrival of monsoon.
“Banking stocks seem purely driven by sentiments,” said V. Sriram, head of corporate and banking consulting at the ratings agency ICRA. “Many first-time investors who always found these stocks costly are finding the current valuations of bank stocks suitable for taking a position. The stocks have benefited and the volumes in these stocks have increased significantly in the past six months.”
But the bad buzz around banks has not stopped yet. Recently, US-based Fitch Ratings downgraded Indian banks, citing further downside risks. The ratings agency said Indian banks needed a capital infusion of $90 billion (about 05.94 lakh crore) before the March 2019 deadline for meeting Basel-III norms.
Moreover, banks already have a large debt balance of their own to mitigate first. Worries over the banks’ rising nonperforming assets persist, even though the RBI has begun addressing the problem and is monitoring some banks. Measures like having an independent corporate entity to deal with bad loans have come as a breather for the banking sector.
But a lot remains to be done to tide over the crisis. “The asset quality [of banks] could deteriorate further over the next 12 to 18 months, given the exposure to stressed sectors, such as infrastructure and iron and steel, and the difficult resolution process for stressed assets in the near term,” said a recent Fitch report. “Earnings for the sector are also likely to be weak due to muted loan growth and high credit costs.”
According to Fitch, the capital position of Indian banks have historically been weak. The situation has worsened for most public-sector banks because of delayed recognition of problem assets and high loan-to-loss ratio, and will remain weak in the near term, unless the government makes significant capital investment.
Investors, however, seem optimistic. And the bank index continues to drive stock market surges. “India is still one of the better-performing among Asian markets. Foreign investors are finding the low stock prices opportune for them to build on long-term positions,” said Kavita Chacko, market economist with Credit Analysis & Research Ltd Ratings.
The surge has also been driven by State Bank of India’s proposed merger with four other State Banks. “The SBI merger proposal is seen as a definite advantage for the stock, as the government is also seen to encourage the same for other banks as well,” said Chacko.
According to her, foreign investors would be keen to keep building positions on public sector bank stocks like SBI, Canara Bank, United Bank of India and Punjab National Bank, at least till the end of the third quarter of this fiscal. The stocks of a host of private banks, including smaller ones like Yes Bank, Kotak Mahindra Bank, IndusInd Bank and HDFC have also given good returns for their investors in the past six months.
Among mid-caps, stocks in the consumer goods sector have earned a reputation for over-performing in the indices. A long-time favourite of bulls in the market, this sector, too, had recovered from its lows in March and April. But the surge has not kept the pace it had before the monsoon. Stocks of consumer goods firms, particularly, witnessed a beating because of poor first quarter results.
Analysts say the rally in the mid-cap consumer goods sector was partly driven by the prediction of good rains. But the monsoon, which was delayed by a month, prolonged expectations of a bull run in these stocks.
“The first quarter results are a direct reflection of poor consumer spending in both rural and urban markets. It shows that farmers and consumers are still not out of the impact of the two-year drought,” said Dharmakirti Joshi, chief economist, CRISIL. “With a good spread of the monsoon this year, we can expect to get some good news from this sector after the third or fourth quarter.”
The consumer goods sector may not remain downbeat for long. Banks, too, could do a turnaround: their stocks remain many times over-invested, but the business results of the banks may improve to support it.
After the monsoon gets over, most market observers are expecting a bumper spend during the festive season (October to December). “Going ahead, even the retail sector can spring a surprise,” said Rajat Wahi, partner and head, consumer markets, KPMG. “We are expecting the subdued demand for packaged retail products in rural markets to pick up with the advance of a normal monsoon this year. All indications are that retail spending will go up significantly by the end of the current fiscal.”
