#Banks need to change their attitude...

Well there is a watsapp joke that is circulating and that is…


PNB’s market cap = 9M slippages = 18000 Crores!

And there are many more like this…


·         Market cap of HDFC Bank is higher than market cap of 70% of the banking system put together i.e. all PSU banks…
·         Market cap of HDFC Bank now is almost 2x that of Deutsche Bank
·         HDFC Bank market cap with almost similar network size is 20% more than ICICI and Axis put together
·         Kotak’s market cap today with a balance sheet size fraction of that of ICICI is more than ICICI
·         13yr old India’s Kotak Bank and 145 year old German global banking giant Deutsche Bank are valued almost the same at~20bn USD.
That speaks volumes about value creation and destruction and puts lot of things in perspective…

Yes I am known for sensationalising things but then, if one of the top 3 PSU banks in the country reports such numbers possibly reporting its worst ever ROA of 25bps for FY16E, worst ever ROE of 3-4% for FY16E and un-provided stressed assets to net-worth at 130% (net NPLs alone are at 5.9% and 54% of net-worth, CET1 is at 8.1%) and mind you this is a bank with US$100bn balance sheet, 6700 branches and 100 million customers – what does it say about the state of the banking system?…Dena Bank and Allahabad bank reported huge losses, PNB reported huge losses at the PBT level…

These are the losses getting reported despite allowing all kinds of regulatory forbearance like restructuring, 5:25 refinancing, SDR etc…PNB’s net impaired assets i.e. Net NPLs + Standard Restructured Assets + 5.25 Refinancing + SDR stand at 170% now!

Does any one really think that the worst is over?

And one of the slides in PNB’s presentation this quarter says that one of its key strengths is “Robust and Agile risk management system”!!! Credit costs for PNB at 240bps for 9MFY16 was the highest ever!!

This is what the MD had to say on CNBC when she was asked about - Is the worst over?
“Hope now is the best companion…I will not say that pain is over. Balance sheet clean up is on and hard to say how long it will last. The surgery is not over”

And then the Government says we will be growing 20bps faster this year at 7.6%??

Head is spinning…

Anyways after hearing that, what do you have to make about this mess which these banks are in?

In a single quarter 15% (on an annualised basis) of loans slipped i.e. 15% is the slippage ratio…Five years ago PNB had a ROA of 1.3%-1.4%, ROE of 20%...We all know how that ROA and ROE was generated when we look at numbers five years later! Forget about RBI’s asset quality review, even if we had excluded that, PNB’s slippage ratio on an annualised basis was 8%!!!

I mean I am so disappointed that it’s my money as a tax payer, is going to fund all these promoters who are chauffeuring around in BMWs and Audis, taking massive loans from these PSU banks and merrily seeing their loans getting written off…And does the legal system help in recovering these written –off loans? As per latest World Bank report, recovery rates in India are pathetic at 25%...
As it is always said, if you take 3 crore loan it is your problem, if you take 300 crore it’s a bank’s problem and if you take 3000 crore then it is the Government’s problem…

How were these banks lending? Did they even have any proper risk appraisal systems in place? What was the regulator doing at that time? What was the Government doing at that time? So many unanswered questions…

We need to change the behaviour of banks, we need to change the behaviour of promoters – all are hand in glove in this…If one keeps on blaming global economy, then why do we have HDFC Bank, IndusInd Bank and Kotak Bank standing tall even in these times??? Some soul searching is definitely required by everyone…And behavioural changes take a lot amount of time…

In that sense we are thankful to RBI’s asset quality review and offcourse Dr. Rajan who has been a blessing for us (hope the Government extends his tenure in Sep-2016!) that all this dirt is coming out…If it hadn’t been for this asset quality review, banks would have ever-greened loans by giving more money to the same promoters under the guise of refinancing and kept them afloat…The problem today has reached unsurmountable proportions is only because of this which has resulted in some groups having 5x+ leverage ratios…

And if this write-offs and reviews and cleaning up of balance sheets will happen till March-2017, when are we going to see recovery if 70% of banking system is unable to lend and in such a sad state?

We definitely can’t blame the current Modi Government as these are issues of the past and lending done under the previous Government…Unfortunately it’s Modi who has to do this clean up and live through the pain…Sorting out this mess is going to take a lot of time…

Is there any price at which you would buy this stock…It looks very cheap? How do you value them?
This is what was asked by couple of clients…PNB was cheap at 150, it is cheaper at 100 and it is now further cheaper at 88! Let me take you back to the limits theorem that we learnt in mathematics…Since reported stressed assets to net-worth is 130% and including all sorts of regulatory forbearance it is at 170%, then as we have learnt – when book value tends towards zero P/BV will tend towards infinity!
Won’t even touch this with a barge pole…