Failure of YES Bank with over Rs 4-lakh crore of banking business and global threat of coronavirus (COVID-19) have shaken the domestic equity markets. Since the February-mid, the global fear of virus spread has eroded around Rs 12 lakh crore in overall domestic market-capitalisation (market-cap) - from Rs 159.60 lakh crore till a day before YES Bank was put on moratorium. Another Rs 3.30 lakh crore of market wealth got wiped out after YES Bank was put on moratorium last week.
In the case of YES Bank, the authorities have done the right thing – of course, out of compulsion – allowing the State Bank of India (SBI) to recue it by taking 49 per cent equity stake. The move would lend some confidence in the banking system and also help in avoiding cascading effect of YES Bank’s depositors (who hold over Rs 2 lakh crore in this bank) defaulting on their own commitments. This bitter episode of individual bank failure would be soon discounted by the domestic equity market. However, a few of the “new” mid-sized ‘private sector banks’ that got listed in recent years, grew their business far superior to banking industry growth. They also commanded valuation multiples at par, or close, to the private leaders. They may see some more significant contraction in their valuation multiples now due to markets’ fear on substantially of such business growth without compromising on asset quality.
In this background, consolidation of public sector banks (PSBs) is a positive development. These five banks, post-consolidation, would command a banking business size of over Rs 70-lakh crore, which would be almost close to one-third of overall banking industry’s business. Eventual consolidation of 13 PSBs into five strong banks in terms of balance-sheet size would provide better cushion in terms of capital adequacy, relatively better capability to identify and also handle fraudulent managements and also the benefits of economies of scale.
Post-consolidation, and possibly with peak out in the non-performing assets, most of these PSBs that trade in the markets at significant discount, might start commanding some premium to their respective adjusted book values in the medium-term. This consolidation process, once completed, is also likely to reduce the burden of the government in terms of need to constantly infuse large capital into these banks from its own Budget. However, these PSBs are most unlikely to follow closely private leaders in terms of superior valuation multiples even in the period of next five years, as the same would call for a consistent outperformance in the business growth over industry growth and also reduction in their net NPAs to less than 1 per cent. But the benefits of PSB consolidation might not help the domestic markets to overcome the short-term fear grip created by COVID-19 as the benefits are likely to occur only after a year or so – and that, too, only to these PSBs and partly to the government.
However, COVID-19 will not put Indian economy in any crisis in the medium-to-long term like other viruses in the past. The health scare would taper-off in India also in a matter of few weeks / months, based on quantum of spurt in the initial stages and also depending upon possible role of temperature (which is set spurt in the next few weeks across India). Unfortunately this renewed deflationary impact on account of virus comes at a time when India’s GDP (gross domestic product growth is at 27-quarter low. The originating country of coronavirus – China – has been able to successfully control the rate of new infections to less than a hundred per day. However, spike and taper off (like inverted V-shape curve) in terms of daily incremental infections looks inevitable in many other major countries in the world, at least for a month.
This virus spread is proven to be more deflationary than trade war due to widespread impact on production and service activities in almost all segments of life due to lock-downs and precautions. Hence, the V-shaped fall and then recovery in the domestic market for another few weeks or a couple of months seems inevitable. The only theme which possibly investors could consider right now is exporters of pharmaceutical products to the US and Japan. The present supply shortage of drugs in these two major economies would eventually force them to be more flexible in future on Indian producers in terms of pricing and regulatory issues. Otherwise, it is better to wait at least for another two weeks before infusing any significant capital in the equities.
Disclaimer: G Chokkalingam is founder and managing director at Equinomics Research. Views are his own.