BANKING ON BANK
Indian Economy & Market|October 2021
Banks after underperforming year till date are likely to outperform once again and continue with their long term trend.
IE&M Research Team

The Nifty Bank has largely underperformed the frontline index Nifty at the start of FY21. Since the start of FY21 Nifty Bank is up by 106 per cent while Nifty is up by 113 per cent. Nevertheless, in the last month, Nifty Bank has been trying to cover up the lost ground. In the last one month Nifty Bank is up by almost 2.5 per cent compared to 1.5 per cent by Nifty. There is a sequence of events and factors that is leading to such outperformance by the Nifty Bank.

Bad Bank to Solve Some Structural issues

Last month, to tackle the growing problem of mounting bad debts in the banking sector, Union Finance Minister Nirmala Sitharaman announced the setting up of National Asset Reconstruction Company Limited (NARCL) under the Companies Act. It thus delivered on its promise to set up a ‘bad bank’ to clean up the balance sheets of commercial banks. Under the new setup, the NARCL will take over loans worth almost Rs 2 lakh crore from the books of commercial banks at a mutually agreed price. The NARCL will pay 15 per cent of the price of these loans upfront in cash to banks and then issue security receipts in lieu of the remaining amount.

The NARCL will then try to resolve these bad loans in a time-bound manner with help from the India Debt Resolution Company Limited (IDRCL). In case the IDRCL is unable to sell these bad loans at a satisfactory price to make good on the security receipts, the Centre will step in and fund the gap, but within a budget limit of Rs 30,600 crore. Indian banks and especially public sector banks have been facing the NPA problem since 2014 without any long-term fixes on sight, however, the formation of NARCL and IDRCL is likely to give a stable solution to this. Besides, it will also help banks to free up some liquidity that will help them in credit growth.

Moody’s raised the rating outlook for 9 banks

Moody’s Investors Service raised the rating outlook for 18 Indian corporates including nine banks, to ‘stable’ from ‘negative’. This rating action is driven by Moody’s recent affirmation of the Indian government’s Baa3 issuer rating and change in outlook to stable from negative. Moody’s also affirmed the long-term local and foreign currency deposit ratings of Bank of Baroda, Canara Bank, Punjab National Bank, and Union Bank of India. The rating outlooks of these have also been changed to stable from negative. Stabilization in asset quality and improved capital are the main drivers of this rating action.

The rating agency in its statement said, “Corporate asset quality has improved as legacy issues have been resolved while deterioration in retail asset quality was relatively moderate,” the agency said. Asset quality will further improve if economic activity continues to normalize.”

The affirmation of BOB, Canara, PNB, and Union Bank’s ratings and change in outlook to stable from negative, reflect the fact that despite the significant economic challenges since the onset of the pandemic, their asset quality has only deteriorated modestly while capital has improved. Such a change in outlook will help banks to reduce its cost of capital as it can borrow at a lower rate now. Profitability will improve over the next 12-18 months as credit costs will decline. Besides, it will also attract many foreign investors towards the shares of these banks as their rating has been improved.

Better Q2FY22 Earnings

Many banks’ pre result updates suggest sequential traction in credit and continued momentum in deposit growth, particularly for CASA deposits. For example, India’s largest private lender HDFC Bank while announcing its Q2 update said that the bank’s advances aggregated to approximately Rs 11.98 lakh crore as of September 30, 2021, a growth of around 15.4 per cent year-on-year from Rs 10.38 lakh crore in the same quarter last year and a growth of around 4.4 on quarter on quarter basis. The bank’s CASA deposits aggregated to approximately Rs 6.58 lakh crore as of September 30, 2021, a growth of around 28.6 percent year-on-year.

Net interest margins (NIMs) were depressed last quarter due to the reversal of interest on high slippage. Lower yields and higher liquidity will put some pressure on NIMs even in the latest quarter; however, it will be offset by a lower cost of finance. Banks have reduced interest rates to spur growth ahead of the festive season but improvement in credit to deposit ratio is expected to offset any pressure. Besides, redeployment of excess liquidity will have a positive impact on NIMs.

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM INDIAN ECONOMY & MARKETView All

Some Unfortunate Truths About Investing

Importance Of Investing

2 mins read
Indian Economy & Market
November 2021

“We've a Lot of Surprises in Store for Investors”

FACE TO FACE DISCUSSION

9 mins read
Indian Economy & Market
November 2021

Raghav Productivity Enhancers Ltd. World's Largest Manufacturer of Silica Ramming Mass

“We aim to be a futuristic company maintaining the global player tag that we have”

8 mins read
Indian Economy & Market
November 2021

It's True, Globalism is anti-democratic

Globalist elites don’t trust you to make the right choice

5 mins read
Indian Economy & Market
November 2021

Rich or Poor

Poverty or Wealth Is A State of Mind.

3 mins read
Indian Economy & Market
November 2021

5 Glittering Stocks for Samvat 2078

Samvat 2077 has been exceptionally well for the equity market. However, Samvat 2078 will be little subdued but these five stocks will add spark to your portfolio.

9 mins read
Indian Economy & Market
November 2021

Will ‘Bad Bank' Craft Good Banks?

Finance Minister, Nirmala Sitharaman has, at last acted upon one of her many announcements during the 2021 Budget presentation, by declaring the creation of India’s first-ever ‘Bad Bank. It will acquire all the NPAs of a bank at a price that is below their book price. It then will work to recuperate and turn around the assets by way of expert management, sale, or restructuring. How effective would be bad bank to solve the mega problem of NPAs? Shivanand Pandit answers this big question.

5 mins read
Indian Economy & Market
October 2021

“GVFL has been at the forefront of ‘Atmanirbhar Bharat' long before the word was coined”

There are a lot of disruptions happening in the entire segment of the economy in these critical times. Please elaborate the kind of crises you faced and what has been the impact of Covid and lockdown?

5 mins read
Indian Economy & Market
October 2021

RAFT MOTORS Revolutionizing the EV Segment

Raft Motors is a new entrant in the Electric Vehicle segment, however, with ever-increasing dealership nodes in major towns, it is fast emerging as one of the industry leaders with innovative products and advanced engineering skills.

9 mins read
Indian Economy & Market
October 2021

KIOCL Limited Despite Lockdown Registered Spectacular Financial Performance

KIOCL Limited, (Previously known as Kudremukh Iron Ore Company Ltd.), a Flagship Company under the Ministry of Steel, was formed in 1976 for mining and beneficiation of low-grade iron ore at Kudremukh, at Chikkamagaluru district of Karnataka. The Company was conferred with Mini Ratna status in 1999. The country’s prestigious Export Oriented Unit (EOU) has its Pelletisation Complex and Pig Iron Complex (Blast Furnace Unit) at Mangalore and engaged in the business of manufacturing high quality Iron Ore Pellets for export and domestic market and supply of foundry grade pig iron in domestic market.

5 mins read
Indian Economy & Market
October 2021
RELATED STORIES

Modi to fugitive economic offenders: Return to country

PM Modi calls on democratic nations to ensure that cryptocurrency does not end up in the ‘wrong hands’

4 mins read
Millennium Post Delhi
November 19, 2021

कई कंपनियों के कर्ज बेचेंगे बैंक

वीडियोकॉन ऑयल, एमटेक ऑटो और रिलायंस नेवल के कर्ज की होगी बिक्री

1 min read
Business Standard - Hindi
November 15, 2021

RBI grants licence to NARCL

The Reserve Bank of India (RBI) has granted the National Asset Reconstruction Company (NARCL), which is seeking to turn around bad loans worth ₹2 trillion, the licence to register as an asset reconstruction company (ARC).

1 min read
Business Standard
October 05, 2021

Chinese Checkers

Evergrande, with a debt burden of around $ 300 billion, is the world’s most indebted real estate developer, and its position has sent shivers down the spine of the world’s financial markets

7 mins read
India Legal
October 4, 2021

'बैड बैंक' के लिए 30,600 करोड़ की सरकारी गारंटी मंजूर

वित्त मंत्री ने कहा, बैंकों की हालत लगातार सुधर रही है

1 min read
Jansatta Delhi
September 17, 2021

एनएआरसीएल को सरकारी गारंटी

फंसे कर्ज के समाधान के लिए राष्ट्रीय परिसंपत्ति पुर्नगठन कंपनी (एनएआरसीएल) द्वारा जारी की जाने वाली प्रतिभूति रसीदों को सरकारी गारंटी मिल गई है।

1 min read
Business Standard - Hindi
September 17, 2021