Banking: RBI to the rescue

The RBI clarification, issued on December 1, 2009, has allowed banks to include technical or prudential write-offs for calculating provision coverage for non-performing assets (NPAs) - mandated to be at a minimum of 70% by September 10. This has triggered a relief rally in bank stocks with reasonably higher NPAs or low provisioning which were underperforming the BSE Bankex (see Prodigal returns).

Prodigal returns
Private Banks				Return Over Bankex
Bank Name	CAR	(%) Gross NPA	(%) Net NPA	1 day	3 months
Dhanalaksh.Bank	14.93	1.73	0.86	4.19	-14.01
ING Vysya Bank	14.48	2.57	1.78	3.87	2.69
Axis Bank	16.47	1.21	0.45	2.73	-8.62
Kotak Mah. Bank	17.72	4.33	2.62	2.48	-9.64
Dev.Credit Bank	14.85	11.24	4.67	1.94	-32.00
Federal Bank	17.91	2.99	0.54	1.9	-16.21
South Ind.Bank	16.26	1.61	0.43	1.77	-3.04
ICICI Bank	17.69	4.69	2.36	1.42	-5.79
IndusInd Bank	13.51	1.5	0.98	1.24	0.81
(CAR = Capital Adequacy Ratio; NPA = Non-Performing Assets)
(Source:- Capitaline)

A further positive for PSU banks in the list is the government’s proposed recapitalisation of banks where government shareholding is below 55%, with funds sourced from the World Bank. Several of these were quoting below book value based on the combination of an expected hit to next year profits as RBI provisioning norms came into play and an inability to effectively utilize a credit cycle growth phase because of low capital. 

PSU Banks					Return Over Bankex
Bank Name	CAR	(%) Gross NPA	(%) Net NPA	(%) of shares held by GOI	1 day	3 months
Vijaya Bank	12.04	2.91	1.46	53.87	4.35	5.13
Dena Bank	11.59	1.98	1.24	51.19	3.37	34.42
Canara Bank	14.46	1.6	1.16	73.17	3.35	26.81
Syndicate Bank	12.02	2.55	0.91	66.47	1.96	-5.42
IDBI Bank	11.9	1.75	1.19	52.67	1.53	-0.94
(CAR = Capital Adequacy Ratio; NPA = Non-Performing Assets)
Source Capitaline

Credit upswing

The Indian economy is primed to see a new credit cycle after bottoming out at 8-8.5% y-o-y growth levels in November 09 as per a Morgan Stanley report on the Indian economy. It estimates credit growth will be 16% by March 10 and 22% by end 2010.
On credit quality, the sense is that impaired assets are at a trough now although NPA accretion will continue for the next two quarters. A revival in industrial production and access to risk capital through revived capital markets will help repair balance sheets and reduce further impairments of assets for banks, according to Morgan Stanley.