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    Quality bank stocks trading at nervous levels due to fear of NPAs: Deven R Choksey

    Synopsis

    ‘Recovery of dues could be better if MSMEs receives proper stimulus package’

    ETMarkets.com
    India’s 60-65% of the economy has started functioning and that is a good point.

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    Some of the April demand is now materialising in May for the auto sector, says MD, KR Choksey Investment Managers.

    Why do banks, especially private banks continue to suffer? What are markets worried about? Why do you think markets are so nervous about owning a stock like SBI?
    As we understand this particular period, the likely NPA is going to be on the higher side. Probably those people who have opted for moratorium, a part of these particular borrowers are likely to default and that could possibly be the reason why some of the banks are trading at a relatively nervous level. Nobody has a clear handle on it.

    We talked to the management of the banks and they rejected this kind of doubt. They say that we are very much under control but at the same time, when you do the ground level checks, many of the businesses are not in a position to pay at least in the near future. So given that kind of a situation, probably one is a little worried about it. Definitely the larger hopes are on the stimulus package that is being talked about. If the MSME segment receives a proper stimulus package, then in such a situation, the recovery of dues could possibly be relatively better.

    On the other side, the government is likely to get into the higher borrowing programme; to the extent of more than 50% additional borrowing that they may have. This could put pressure on the cost of funds and act as fuel to the fire in most situations where on one side you may want to have a lower cost of fund but because of the programme of the government to borrow and fund the economy, the cost of fund may not come down. So this is another area where I think people are a little bit sceptical that the corporate sector may have the ability to pay to the banks and that is the reason we saw a fall yesterday as far as the banking stocks are concerned. Though we cannot generalise all the banks into this particular category, yes, there is certainly an element of doubt as far as the bank results are concerned going forward in the coming quarters.

    I am going to discuss SBI, India’s biggest bank. They own India’s biggest credit card business, own India’s biggest AMC, own a great franchise like SBI Life and SBI General Insurance. Yet the stock today is trading at a 52-week low. It has gone below the March lows and is at 52-week low when even markets are not at 52-week low. So what happens now? Is SBI a value buy or will it continue to drag the market lower?
    In the near future, you are likely to see the drag continue. That is what my take is unless you see a strong emergence of buying from the long-term investors. As of now, most of the long-term investors with liquidity in their hands would try and drive at least in the private sector banks if not the public sector bank. For whatever reasons, they are AAA. But SBI as a bank with a very strong franchise is down in the normal market situation.

    I think there are doubts as to what would be the government's stand on SBI and how they would ask SBI to write some of the assets. Whether the bad books or the bad assets which are talked about, SBI is likely to get into the funding mode of some of them. All of these are some question marks and as a result SBI is finding less preference. I must maintain that in a normal market situation, this becomes definitely a buy opportunity.

    Given the context of what IndusInd has been dealing with, what is your perspective on some of the bad loans or potential downgrades? How significant could this be for them and how is the market going to track this news should we actually see a culmination of the deal?
    The situation for them is not very different from the other banks. The commercial vehicle loans portfolio definitely would demand some amount of moratorium. Fortunately, the diamond portfolio probably would start getting serviced well because they have been allowed to start the operations and some of the diamond traders have confirmed that they have got the export orders to meet. So certainly, that is a better sign for the bank as far that part of the portfolio is concerned. But for the rest of the portfolio, the amount of moratorium led deferment of payment is definitely going to be a challenge like in many other banks.

    Going forward, how soon and fast you should see normalcy in the banking operation would depend a lot on how exactly the industry starts its operation. Currently, the industry is struggling on one side. They want to start the operation, but on the other side, the situation pertaining to the workers is coming in the way. At the same time, oil which is likely to start rising is also going to cause higher commodity prices, which we have started experiencing in at least some pockets.

    So on one side cost pressure will continue and on another side, the lower production-related and market-related things would all translate to higher problems again for the bank as a whole. So I am not distinguishing one bank from another but generally I find that this is a challenge that they will have to meet. Who can mitigate better probably deserves a relatively better acknowledgement and the higher market price in the stock market.

    You are making a case that oil prices have gone higher but agrarian and other commodity prices have not gone higher. Why did auto stocks rally yesterday? Is there merit in being a contra buyer in Maruti now that the economy is partially improving? Car sales will start picking up. Hero Honda came out with this number yesterday where they are indicating that in the first week of partial lockdown lift, they have managed to sell 10,000 bikes?
    The underlying demand which till now had to be postponed because of complete lockdown is now materialising. Largely if you see, out of 700 districts, 130 districts cover the larger cities like Mumbai, Pune, Ahmadabad, Delhi, etc and they are 41% of the total demand in the country. They are locked down but rest of the places have started opening up and that is the reason we are seeing the relative amount of confidence returning back that the manufacturers of auto are exactly seeing. They are seeing some amount of demand which otherwise would have not materialised is now happening because of the lifting of the lockdown. We wish that this particular situation becomes normal and some normalcy returns into the consumer buying.

    India’s 60-65% of the economy has started functioning and that is a good point. We do not know completely about how Maruti will be in a position going forward as well but as we cross every single day, we learn new things. In this case too, I would believe that some of the demand which up till now was for the month of April has shifted to May and is now materialising and that is where we are seeing the numbers peaking up. Fortunately, we are seeing that it is on the other side. So we hope that it remains on the higher side going forward as well so that the factories can probably come to normalcy level in some months time from now.

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    3 Comments on this Story

    BARUN Mukherjee61 days ago
    Deven Sir, your observation regarding SBI is very practical and appreciate.
    Suresh Kamath61 days ago
    Good analysis from Deven as usual and his feeling of the Market Pulse is Spot on and hope the Govt does it's Best efforts to surge the ECONOMY with a good Booster Dose for ALL Sectors of Growth Industry and pick the tabs and RACE ahead of the COMPETITION across the GLOBE to RISE AGAIN as a PHOENIX does and INDIA CAN and SHOULD Lead the WORLD and NOW is the Time for ALL Indians to SHOW their Potentials and with a Strong VISION and MISSION Jai Hind Jai Jawan
    Skywalker 62 days ago
    Bank stocks are ready for a deep nose dive
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