Essar Steel case verdict a big positive for banks; SBI top pick: Analysts

Public Sector Banks (PSBs), including State Bank of India (SBI), Central Bank of India, Canara Bank and Syndicate Bank, gained for second straight day, up over 5 per cent in the morning deals on Monday, after analysts turned bullish on the country's financial sector post the Supreme Court's ruling in the Essar Steel Case. Besides, the government's decision to bring financial services providers under the ambit of Insolvency and Bankruptcy Code (IBC) code further boosted sentiment. 

Individually, Central Bank of India advanced the most, up 5 per cent, while SBI, Union Bank of India (UBI), and Syndicate Bank jumped 3 per cent. Shares of Canara Bank, Punjab National Bank (PNB), and Indian Bank, too, gained up to 2 per cent.

On Friday, the government came up with an interim framework for resolving financial stress in financial service providers (FSPs) through a structured resolution and liquidation proceedings. According to the rules notified by the Ministry of Corporate Affairs, financial services providers, or classes of such entities, will be covered by a special window under the bankruptcy code, which will be notified from time to time. Further, only a regulator will be allowed to refer a non-bank lender or housing financier to a bankruptcy tribunal.

“The special framework provided under Section 227 of the Code for financial service providers is essentially aimed at serving as an interim mechanism to deal with any exigency pending introduction of a full-fledged enactment to deal with financial resolution of banks and other systemically important financial service providers,” Injeti Srinivas, secretary, corporate affairs, said in a press statement. READ MORE

"The move is positive for the entire sector as this will lead to easy liquidation of stressed financial companies and lead to better recoveries in the coming quarters," says A.K Prabhakar, head of research at IDBI Capital.

SBI: the key beneficiary

According to global brokerage firm JP Morgan, the government's move for the resolution of stressed NBFCs is positive for the sector. Analysts at the firm have set a target price of Rs 375 on SBI, which they believe, is "among the banks most exposed to play resolution cycle". 

Furthermore, foreign brokerage Nomura, too, maintained a 'buy' (target price Rs 400) on SBI, and said the bank "can provide for majority of their potential stressed loans".

Meanwhile, in another development on Friday, the Supreme Court  cleared the decks for ArcelorMittal to take over Essar Steel. Analysts say move is expected to not only free up a significant amount stuck in resolution, but strengthen the position of banks in negotiating resolutions.

"The verdict was long overdue and allays investors’ anxieties on the outcome of the resolution. Banks will have higher recoveries than before and this creates a precedent for upcoming resolutions," says Siddharth Purohit of SMC Institutional Equities.

"The SC judgement is positive for SBI (and ICICI bank among private banks). Now, banks would be able to recover nearly 90 per cent of dues, as against an expectation of 60 per cent earlier," said Nomura in a note. The brokerage firm, now, expects the bank to recover nearly Rs 12,000 crore (againt due amout of Rs 13,226 crore). 

"This (the judgement) should significantly reduce the scope for long drawn-litigations under IBC and would eventually lead to faster resolutions of stressed assets," Rajnish Kumar, Chairman, SBI said on Friday.

At 10:45 AM, the Nifty PSU Bank index was trading 0.83 per cent higher, as against an unchanged Nifty50 index.