Moody’s downgrade of the Indian banking system could not have come at a more “I told you so!” time. Today morning, we and the Indian bourses woke up to Moody’s Investor Service downgrading India’s banking system to “negative” from “stable”, as it warned of slowing growth at home and overseas hitting asset quality, capitalisation and profitability.
It was nothing new; most in the market knew what Moody’s had said and the Q2 numbers of many banks, mostly public sector banks, posted a not-too-good set of results and heckles were already raised over the asset quality. Moody’s downgrade just went on to reiterate what was already known as visible.
To compound matters further, SBI declared its Q2 numbers today. Though NII and profitability figures look good, after sifting through the finer details, it was evident that the numbers were only “looking” good but underneath the make-up, the skin remained parched and dry.
At a glance, when one looks at the numbers, it does not look too bad - 12% rise in net profit at Rs.2,810 crore; NII up 46.5% at Rs.10,422 crore. The profitability actually beat most analysts forecast. But the NPA and provisioning’s blurred the profit numbers completely. SBI’s gross bad loans rose from 3.35% on a YoY to 4.19%. Net bad loans rose from 1.7% to 2.04%.The slippage ratio is at 5.2%. SBI is aggressive when it comes to lending, which is at the behest of the Govt. But when over 4% of that book is bad, how can this be prudent banking?
Today, you talk to any brokerage house or analyst and most prefer the private sector banking stocks to public sector. And that brings us to a very pertinent question – is it prudent to buy any stock which is owned by the Govt? Usually, when we want slow and staid but secure returns, PSU stocks were always stated to be best. They were safe as far as promoters went as the Govt of India could neither debunk with the money nor hoodwink the shareholders. But in the current scenario, when we are questioning the very credibility of this Govt, its paralysis on policy action, how can companies under its gambit not get affected?
In 1990’s the Govt, when caught in a similar bind has directed PSU oil companies to pick up equity stakes in one another, which meant their surpluses got locked in a labyrinth of cross holdings. There was also a time when the Govt had directed PSU companies to pay out minimum dividends of 20 or 30% per annum, irrespective of the balance sheet.
But more importantly, one question which increasingly comes to mind is whether it is prudent to buy PSU stocks when Govt runs it like its fiefdom? SBI itself is an example of this fiefdom, where despite the current scenario, the Govt has been pushing SBI to lend to keep the economy buoyant. Infact the PMO has “directed” 10 ministries and departments to look at 24 cash-rich PSUs for surpluses that are unlikely to be needed for investment in the next 12 months. The Govt has stated that such surpluses can be used to reduce to fiscal deficits wherever it can. The idea is that the Govt wants ‘promoters’ of cash-rich PSUs to buy back around 5-10% of their own equity and give the money to the Govt. It is hoping to get special permission from SEBI for such ‘restrictive' buybacks. How can the Govt even think of doing this? If some promoter of a private sector company had proposed this, we all would have howled bringing down the company with the promoter running for cover! But here, the promoter is the Govt of India; is such preferential allowed just because it is the Govt, paying no heed to the minority shareholders? And the Maharatna companies are supposed to enjoy the highest level of autonomy but when the Govt rules, can a company, say, like Coal India refute the Govts directive?
The Govt should remember that many in the market still prefer PSU stocks to private sector due to the strict corporate governance they need to adhere to, when the Govt does not meddle. That apart, PSU companies are cash rich but if the Govt starts plundering it, will they have the hold which they enjoy now?
It was nothing new; most in the market knew what Moody’s had said and the Q2 numbers of many banks, mostly public sector banks, posted a not-too-good set of results and heckles were already raised over the asset quality. Moody’s downgrade just went on to reiterate what was already known as visible.
To compound matters further, SBI declared its Q2 numbers today. Though NII and profitability figures look good, after sifting through the finer details, it was evident that the numbers were only “looking” good but underneath the make-up, the skin remained parched and dry.
At a glance, when one looks at the numbers, it does not look too bad - 12% rise in net profit at Rs.2,810 crore; NII up 46.5% at Rs.10,422 crore. The profitability actually beat most analysts forecast. But the NPA and provisioning’s blurred the profit numbers completely. SBI’s gross bad loans rose from 3.35% on a YoY to 4.19%. Net bad loans rose from 1.7% to 2.04%.The slippage ratio is at 5.2%. SBI is aggressive when it comes to lending, which is at the behest of the Govt. But when over 4% of that book is bad, how can this be prudent banking?
Today, you talk to any brokerage house or analyst and most prefer the private sector banking stocks to public sector. And that brings us to a very pertinent question – is it prudent to buy any stock which is owned by the Govt? Usually, when we want slow and staid but secure returns, PSU stocks were always stated to be best. They were safe as far as promoters went as the Govt of India could neither debunk with the money nor hoodwink the shareholders. But in the current scenario, when we are questioning the very credibility of this Govt, its paralysis on policy action, how can companies under its gambit not get affected?
In 1990’s the Govt, when caught in a similar bind has directed PSU oil companies to pick up equity stakes in one another, which meant their surpluses got locked in a labyrinth of cross holdings. There was also a time when the Govt had directed PSU companies to pay out minimum dividends of 20 or 30% per annum, irrespective of the balance sheet.
But more importantly, one question which increasingly comes to mind is whether it is prudent to buy PSU stocks when Govt runs it like its fiefdom? SBI itself is an example of this fiefdom, where despite the current scenario, the Govt has been pushing SBI to lend to keep the economy buoyant. Infact the PMO has “directed” 10 ministries and departments to look at 24 cash-rich PSUs for surpluses that are unlikely to be needed for investment in the next 12 months. The Govt has stated that such surpluses can be used to reduce to fiscal deficits wherever it can. The idea is that the Govt wants ‘promoters’ of cash-rich PSUs to buy back around 5-10% of their own equity and give the money to the Govt. It is hoping to get special permission from SEBI for such ‘restrictive' buybacks. How can the Govt even think of doing this? If some promoter of a private sector company had proposed this, we all would have howled bringing down the company with the promoter running for cover! But here, the promoter is the Govt of India; is such preferential allowed just because it is the Govt, paying no heed to the minority shareholders? And the Maharatna companies are supposed to enjoy the highest level of autonomy but when the Govt rules, can a company, say, like Coal India refute the Govts directive?
The Govt should remember that many in the market still prefer PSU stocks to private sector due to the strict corporate governance they need to adhere to, when the Govt does not meddle. That apart, PSU companies are cash rich but if the Govt starts plundering it, will they have the hold which they enjoy now?
