German brokerage Deutsche said 2016 would be a tough year for Indian banks as loan growth still remains slow and the rate cycle has largely played out
Bank Nifty, the guage of top banking shares, touched new lows on Monday as the sector continues to reel under the asset quality pressure even as the Reserve Bank of India (RBI) has asked the banks to clean up their books by March 2017.
The Bank Nifty closed 185.5 points, or 1.22%, lower at 15,020.80 after touching a 17-month low of 14,956 during Monday’s trade. IndusInd Bank was the biggest loser among the banks with its shares declining 2.68%. Shares of State Bank of India lost nearly 2%, while HDFC Bank declined by 1.13% during the session.
The RBI has recently sent banks a list of around 150 companies which have not been uniformly classified by various lenders and asked them to provide for such accounts by March 2016. This seems to be the first step in RBI’s bad loan clean-up drive announced by governor Raghuram Rajan.
Amid heightened concerns about growing NPAs, low credit growth and below-expectation earnings, shares of the banks have been under selling pressure for the last six months. The Bank Nifty has lost close to 20% since August, 2015. Shares of State Bank of India – India’s largest public sector lender – declined close to 30% during the period while shares of Punjab National Bank lost nearly 40% in the last six months.
Near- to medium-term prospects of Indian banks continue to look challenging, market participants said. German brokerage Deutsche said in a note to investors that 2016 would be a tough year for Indian banks as loan growth still remains slow and the rate cycle has largely played out. “RBI’s drive to build up contingencies will result in higher credit costs at times when NIMs are declining. Divergence will widen further between retail and corporate banks,” the brokerage said.
Investment banking firm Macquaire observed as ‘precarious’ that state of the Indian banking system. “We believe the government, regulators and policymakers are underestimating the magnitude of stress in the banking system. The issue is that the balance sheets of banks have become very opaque as banks try to camouflage by resorting to 5:25 refinancing, restructuring, SDR, NPL sales, ever-greening, etc, and thus looking at reported earnings has become futile in many cases,” the Australian brokerage said in a research report.