Banks Bashed by High Interest, Low Growth-
Taken from Wall Street Journal 29th September 2013
Indian Banking shares are getting pummeled on concern that their earnings will slide and bad debt loads will soar as they struggle with an economic slowdown and a surprise round of monetary tightening.
Many of India’s top lenders– including the State Bank of India 500112.BY -1.08%, Punjab National Bank 532461.BY +0.34%, Yes Bank 532648.BY -1.33% and Axis Bank 532215.BY -0.04%– have plunged more than 30% in four months since the U.S. Federal Reserve indicated it was considering ending its easy money policy which has kept capital cheap around the world.
Even as the Fed put off its tapering plans, the Reserve Bank of India turned hawkish, lifting its key lending rate for the first time in two years to fight inflation.
The prognosis on banks took a further beating this week, after rating agency Moody’s downgraded its outlook on the financial strength of State Bank of India, the country’s largest lender. State Bank’s credit profile continues to face negative pressures, and it will have to compete with other public sector lenders for a capital injection from the government, Moody’s said.
“The action is driven by the prevailing economic condition, which is showing no signs of recovery,” Moody’s said through a news release. “The weaker conditions will negatively affect the asset quality, profitability, and capital of public sector banks, including SBI.”
While SBI said Moody’s concern was misplaced, it admitted that it expects times to get tougher before they turn up.
“If the broad economy is in stress and there is less demand then obviously that will impact the topline of the businesses which we have funded,” Arundhati Bhattacharya, managing director and chief financial officer told a news conference called to respond to the Moody’s concerns. “So, to a very large extent, this is also a function of the way the economy will perform. We are bringing down the credit cost of our loans. We are lending only to better rated and better quality assets.”
The S&P BSE Bank sector index is down more than 25% over the last four months since the beginning of the Fed’s tapering talk. Analysts say banks are in for more rough times ahead thanks to bad loans due to slowing economic growth and larger losses on their bond trading portfolios as yields rise and prices fall.
The ratio of bad loans to overall advances for commercial banks jumped to 3.92% the last quarter ended June 30. That’s up from 2.36% just two years earlier.
While the growing bad loan problem isn’t big enough to put any banks in danger, it will fester and grow if left unaddressed, new central bank Governor Raghuram Rajan warned in his debut speech earlier this month.
“Rising bad loans, due to some unsecured lending to the infrastructure and textile (sectors), have hit banks,” said Nilesh Karani, vice president for research at Mumbai-based Magnum Equity Broking Ltd. “High interest rates and slowing growth have dented the ability of some companies to repay their debt.”
Banks had been hoping for some relief as India’s central bank was expected to start loosening its monetary policy soon. But the RBI shocked investors with a benchmark rate hike last week. While the central bank tried to reassure investors that other policies would help create more liquidity for lending, banking shares were hardest hit by the news.
Economists are now divided on whether the Reserve Bank of India will raise rates further. Some expect the central bank to increase interest rates by another quarter of a percentage point in the next quarter. In a recent note, brokerage Morgan Stanley Research said it believes that over the next six to nine months, domestic demand will be constrained due to high interest rates.
–Sudeep Jain contributed to this post.
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