Rally in banking stocks after RBI lightens NPA load

MUMBAI: Banks don’t have to provide for potential losses on loans in the case of Pink City Expressway, BSES Yamuna and BSES Rajdhani, and are most likely to get relief in case of Nagarjuna Oil after RBI decided to review the list of 150 truant firms following representation from lenders that many have improved their performance.

The late Wednesday communication from RBI contained the names of Pink City Expressway and the two BSES companies along with Jaiprakash Associates and Coastal Energen. Banking officials confirmed that the three companies too have been taken off the list.

ET was the first to report on Thursday that RBI was pruning the list of 150 accounts that lenders must compulsorily provide for. The news led to a rally in bank stocks.

Banking shares rallied sharply on Thursday with State Bank of India, ICICI Bank and Axis Bank climbing as much as 8%. RBI’s directive on Wednesday is also seen as an indication that the central bank’s bitter medicine for lenders is working with many entrepreneurs getting serious about accelerating asset sales and repaying banks for fear of losing control, said investors.

A Credit Suisse report said the bottoming-out of the steel cycle could also boost corporate lenders. Pink City Expressway is a threeway joint venture between KMC Constructions, Emirates Trading Agency and IKSHU Infrastructure, which is building a six-lane highway between Gurgaon and Jaipur, according to the company website. The total cost of the project is estimated at Rs 1896.25 crore with a concession period of 12 years.

Nagarjuna Oil is building a 6-million-tonne refinery in Cuddalore, Tamil Nadu, at a cost of Rs 11,500 crore, says the group website. It plans to expand it to 12 million tonnes in phase-II of expansion. The total debt for both the companies is not known.

“The (RBI) move will give partial relief to the sector. However, this will add positive sentiments to the markets,” said Gopal Agrawal, chief investment officer, Mirae Asset Global Investments. “Investors should remain selective about stocks, though any recovery in the economy along with lower interest rate regime can boost the sector.”

The Bankex index, which has been underperforming the broader market for the best part of the year, is slowly gaining ground. On Thursday, Bankex was the best performer, climbing 1.95%, while the benchmark Sensex rose 0.14%.

ICICI Bank ended 6.26% higher at Rs 253 while SBI rose 3.68% to Rs 194. Axis Bank ended 2.08% higher at Rs 476.

RBI decided to exempt banks from providing for bad loans in 20 accounts after these companies began meeting payment deadlines and showed they are on track to meet future dues as well. Some, such as Jaiprakash, are selling assets like cement plants and power units to reduce debt.

In December, RBI forced banks to treat some 150 loan accounts, which they were maintaining as standard accounts, as bad debt and provide for them. In many cases, the borrowers were paying at the fag end of a quarter just to avoid the tag of bad loan, but were financially weak.

Some were gaming the system by borrowing from one bank to pay another. “This move is positive for the banking sector,” said Parag Jariwala, vice-president (institutional research) at Religare Capital Markets. “In our view, corporate lenders such as ICICI Bank and State Bank of India will benefit the most, as they have the highest exposure to borrowers such as JP Associates, Essar Group, GMR and GVK.”

The recovery in metal prices, especially steel, has also boosted bank stocks. “Steel sector exposure of Indian banks is high at 60-120% of their net worth, hence a bottoming-out of steel cycle will be a relief to corporate lenders,” said Credit Suisse in a report. The brokerage upgraded ICICI Bank to ‘outperform’ from ‘neutral’, and also raised the target price to Rs 295 from Rs 258. It also increased the price target for Axis Bank to Rs 528 from Rs 478.

HIGH TREASURY GAINS Analysts also expect banks to report high treasury gains in the March quarter since G-sec yields have declined by 30 basis points quarter-on-quarter on expectations of rate cut by RBI.

Fund managers, however, warn that corporate lenders may continue to face headwinds in coming quarters. The retail segment, though, is expected to grow at a healthy pace and banks with a major presence here and relatively lower exposure to stressed loans, such as HDFC Bank and Kotak Bank, would continue to outperform peers.