Private sector banks come under the scanner

Their return on assets and fee income could be hit as the Reserve Bank might tighten other norms

Some of the best known private sector banks have been in the news for all the wrong reasons over the last few days. While news of a boardroom battle at YES Bank broke over the weekend, the Reserve Bank of India (RBI) imposed monetary penalties on ICICI Bank, HDFC Bank and Axis Bank for violations in know-your-customer (KYC) and anti-money laundering norms. The central bank was investigating the matter after a sting operation conducted by Cobrapost.

These developments are making investors question the policies of the management. While the boardroom battle is not likely to impact YES Bank's financial performance, RBI's action (monetary and otherwise) against the three private banks might have some impact on their financials in the current financial year. Though the maximum monetary penalty is Rs 5 crore, it's the non-financial penalty that will bite more, believe market experts.

What the Street is concerned about is not the financial penalty imposed by RBI but the acknowledgement that there have been lapses. This would lead to RBI going slow on new branch licences and tightening other norms. The only good news is that there is no prima facie evidence of money laundering. This would significantly reduce the negative sentiment around these stocks. The central bank has acknowledged that some of the other lapses include non-adherence of KYC norms for walk-in customers wishing to make investments in third party products without submitting permanent account number (PAN). Other violations include non-verification of source of funds credited to a few non-resident ordinary accounts. Analysts believe RBI will take non-monetary measures to prevent a repeat of this.

Analysts believe some of these measures would impact their returns. Ambit Capital expects non-monetary actions (slower approval of branch roll-out plans and greater curbs on third-party distribution) by RBI to exert downward pressure on private sector banks' return on assets (to the extent of 10-30 basis points).

The Street is expecting RBI to come out with comprehensive norms on wealth management and marketing and distribution of third party products like insurance and mutual funds. As a consequence, wealth management fees of these three banks could come under pressure. A note by Morgan Stanley says: "We compute the impact on earnings of a 25 per cent decline in wealth management fees at one to two per cent for Axis, HDFC Bank and ICICI Bank in FY14."