Credit Suisse’s optimism after India’s October decision to inject funds in state-owned banks has given way to concerns as higher provisions, rising yields and the fallout of nearly Rs 13,000-crore fraud are expected to leave them with no growth capital.
The brokerage, in its India Model Portfolio, lowered the weight of state-owned lenders and increased that of their private peers by 80 basis points. The decline in private banks stocks in the last six months has also made them attractive, according to Credit Suisse.
The competitive environment in the banking system has changed again in the last two months, Credit Suisse said. With the Reserve Bank of India’s new provisioning norms and heavy treasury losses, the brokerage said, public sector banks may no longer have the growth capital expected after the Rs 2.11-lakh-crore recapitalisation announced nearly five months ago.
The government’s move asking public sector banks to check all bad loans above Rs 50 crore for possible fraud could also slow down lending, it said.
The stringent directive came after jeweller Nirav Modi and his firms borrowed Rs 12,700-crore overseas on allegedly fraudulent guarantees issued by some of the employees of a Mumbai branch of Punjab National Bank, India’s second-largest state-owned lender. The central bank has already banned such guarantees called letters of undertaking or comfort.
The Nifty PSU Bank has declined 4.11 percent since October when the bank recapitalisation was announced—most of the losses coming after the PNB reported the fraud. Credit Suisse’s model portfolio, however, outperformed MSCI India by 1.3 percent during the period, largely on the back of non-banking finance, consumer, healthcare and metal companies.
- The brokerage remains ‘Overweight’ on metals despite the threat of a war and an inventory build-up in China after U.S. President Donald Trump imposed tariffs on steel and aluminium imports.
- The brokerage is bullish on the information technology sector. “While the IT sector's price-to-earnings ratio discount has now moved to zero, there is potential for further re-rating,” it said. Credit Suisse increased IT weight by 20 basis points in its portfolio.
- It remains ‘Underweight’ on cement.