Inefficiencies To Stay, But PSU Banks Can Now Compete Better, Says Credit Suisse
India’s mega bank recap may not solve PSBs inefficiencies, but will help them compete.
The Centre’s record bank recapitalisation plan won’t do anything to address inefficiencies at state-owned lenders but will help dig them out of financial troubles and boost competitiveness, according to brokerage Credit Suisse.
“The fundamental problems of PSU banks’ inefficient lending practices, an ageing workforce and slow technology transition, do not get affected by this recapitalisation,” Credit Suisse analysts Neelkanth Mishra and Prateek Singh, wrote in a research note. However, “with adequate growth capital, PSU banks can now compete,” with their private sector peers, they added.
India announced a Rs 2.11 lakh crore package to strengthen public banks. This includes Rs 1.35 lakh crore through recapitalisation bonds, and Rs 76,000 crore via budgetary support and market borrowings. The plan comes as a big relief for capital starved banks, who have been struggling to provide for stressed assets. Bad loans in Indian banking system have crossed Rs 8 lakh crore as of June 30, prompting banks to lend more conservatively. This coupled with low capacity utilisation at factories has kept private sector investment stagnant.
Better Than Fiscal Stimulus?
Credit Suisse said that the plan is a “fiscal stimulus with a strong multiplier” and can enable banks to infuse almost Rs 9 lakh crore into the economy as it seeks to shore up banks’ capital and drive loan growth.
Assuming that Rs 0.9 lakh crore of the total recap amount is allocated towards spurring growth, it would result in potential lending of up to Rs 9 lakh crore, the research note said. That's because state-owned banks usually run with loan-to-equity multiples of around 10, meaning, they usually lend around ten times their total equity. The other Rs 1.2 lakh crore would go towards provisioning for stressed assets.
Of course, not all these funds can (or even should) flow in immediately, especially as the problem seems to be loan demand rather than supply.Credit Suisse Research Note
Increasing Competition
Credit Suisse noted that the banking system has seen two strong trends in the last five years. One was that the spread between bank rates and bond yields were widening, and second, that the net interest margin of private banks had been expanding.
"The root cause of this, in our view, was the weakness of PSU banks and their inability to lend," the report said. This trend would start to reverse, even if public banks do not capture back their lost market share immediately, it added.
Portfolio Changes
In light of the recapitalisation plan, Credit Suisse has reducing its position in private sector banks “as the assumption that these banks can keep gaining market share from PSU banks is no longer as strong as it was earlier,” the note said.
- The brokerage cut its overweight rating on private banks to neutral.
- It cut non-banking financial companies to an underweight rating, especially reducing the weightage of housing finance companies.
- For PSU banks, the brokerage moved to a “strong overweight position” from an underweight rating.
Also Read: The Mega Bank Recap: The Best Of Bad Options