Tumbling Top 10 PSU Banks ~ Govt & MOF & RBI & Banks all to Blame

Last Few Years I have consciously stayed away from PSU Banks,Oil  & Steel & Power Companies

Now you’ll know why !

There has been serious wealth destruction for those who had invested in them

So it was always with some degree of amusement I observed many analysts and fund managers and stock market experts recommend these over the years and justify their call even when it was obvious these companies were bleeding profusely

This Post is about  PSU Banks

Who is to Blame for this Wealth Destruction ?

I squarely lay the Collective Blame on the various Central & State Governments that ruled  & rule,Ministry of Finance Bureaucrats &  Finance Ministers,the Board of Directors of all these Banks led by the Chairman & MDs & even the RBI Boards led by the various Governors & their deputies in these last few years….they preach Corporate Governance but do not practice it….how else will vested interests be served

They have deliberately let this come to past throwing caution to the winds when Lending and then not providing adequately and in time for the NPAs many of which were not even identified as such ….and their delay in declaring many defaulters as wilful…Supreme Court has been seized of this danger and have directed RBI to provide to it within six weeks  in a sealed cover the list of all defaulters over Rs 500 crs.One Bank Chairman in the analyst meet for Q 3 FY 16 results recently  refused to identify the Big Defaulter for which the Provision was made !   

If it was not for the aggressive stand taken by the present Governor,Mr Raghuram Rajan and the Asset Quality Review in the second half of 2015,the Banks would have continued under providing for NPAs & even not identifying them in their entirety…the role of statutory auditors too comes under scrutiny here

The result has been a damaging Q 3 FY 16 for the PSU Banks as they have been forced by RBI to provide properly based on the AQR conducted

It is in this context I am astonished at the recent lament by none other than Mr Deepak Parekh who says that if the Banks have to undergo one more quarter of provisioning for NPAs like Q 3 it would tantamount to an Anesthesia  overdose & Banks would become comatose !…Come On Mr Parekh !

RBI has asked the Banks to clean up by March 2017

My worry is that NPA Levels may increase on better & proper identification & classification and there will be more pain for these Banks.This would mean higher Provisions for the next few quarters

Falling Interest Rates & continuing Low Credit Off take ,Growing Competition from Private Banks & the new Niche Services Payment Banks would mean pressure would remain on the Bottomline.Increasing NPA Provisions will only accentuate the stress levels in Operations

In 2011 RBI allowed Banks to provide less than the 70% threshold Coverage Ratio.This has turned out to be a disastrous move .Have a look below.All banks have a lower than 70 %  PCR & many don’t have cushion of adequate Reserves to support stronger Provision on existing NPAs and god forbid any further incremental provision on incremental NPAs.

For 9 of the 10 Banks(it’s a kinder scenario for Leader State Bank of India  )  the Gross NPA Levels have gone up by a staggering 100% to 400% inside three years ! Phew ! that’s  Deep ICU Territory !   ~ No wonder Bank of India which at Rs 250 a year ago at PBV of 0.5 has collapsed to just Rs 85 and PBV of just 0.2 !   ~ and UCO Bank’s Networth is under the severest threat 

Just have a look at the Top 10 PSU Banks Stats (Figures are rounded off) compiled below in three grids and your anger will express it self  

All are quoting at 52 Week  Low Levels with potential of  more  decline

Tumbling Top 10 PSU Banks

Share Price Valuations & Trends

Shareholding ,Dangerous Increase in Gross NPA Levels & PCR  

Relative Valuations

* Projected FY 16 PAT or Loss is computed on the basis of adding or substracting (as the case may be) Q 3 FY 16 PAT or Loss to the 9m FY 16 recorded PAT or Loss  as it has been reported that all the above Banks,except Bank of Baroda, have followed RBI’s allowance to divide equally the incremental Provision for NPAs between Q3 & Q4 .Bank of Baroda has opted to provide full in Q 3 itself and hence Q 2 PAT has been reduced from 9m Loss to project full FY 16 Loss

Going Forward Government is reported to be considering a few  measures to strengthen PSU Banks like those below :

1. Recapitalisation of the PSU Banks
2. Mulling FDI/FPI to 49% from the existing 20% & even diluting Govt stake to 51% ~ Till a few years ago  State Bank of India FPI cap shareholding  was full at 20% & no further purchase was allowed.Today it’s fallen to under 12% (See relevant grid above).Most other Banks have insignificant FPI Stakes ~ so even if Govt mulls this rise to 49% will it make a difference ,especially as Govt will continue to retain Controlling Ownership of  at least 51% ~ there is a growing voice for Privatisation of PSU Banks ~ just to go back in history Nationalisation of Indian Banks took place in 1969 ~ are we to go back on this !? ~ Bank of India with Net Worth over US $ 4.5 Billion is available at under a Billion Dollars while UCO Bank  with Networth  of nearly US $ 1.7 billion can be yours for under half a Billion Dollars ! ~ Unions were against Computerisation decades ago ! & they’ll surely be against Privatisation ! 
3. Bankruptcy Laws 
4. Transparency in the Appointment of Board of Directors & Proper Authorisation & Accountability when Approving Loans  with no interference by the Government ~ Fingers Crossed here as on paper this has always been there but subversion was the norm !
5. Consolidation   ~ Merging a Weaker Bank into a Stronger one

Sense any Opportunity Guys !?  on the conviction that PSU Banks are too Big to be allowed to fail ! (recall Post Lehman 2008 & Citibank below the price of a McDonalds Burger !) ~  or you think Bank of India which dropped from a seductive  PBV 0.5 a year ago to an even more seductive PBV 0.2 now will  drop into a PBV of 0.1 ! ?

One last thought ~ Any Connection between Reliance Industries & the PSU Banks Dangerous NPA Levels ! ?  

Cheers !