Banks

Dear All,

While I am veering around to the view that banking may shortly see its decadal peak and therefore presents only short term trading opportunities. Increased regulation has generally had a negative impact on businesses and stock prices.  Remember the impact of activist regulation on mutual funds and insurance industries or on cement in the past or currently in telecom. Banks were always highly regulated, but may see increased oversight especially with adoption of Basel III norms nearing.

Much of the regulatory oversight mentioned above is required from a consumers’ perspective and hence I am not arguing against the regulation but merely pointing out its impact.

Mandarins certainly would not have thought about banks when the Rupee was allowed to depreciate despite a history of corporate disasters due led by foreign borrowing. In this economic milieu there are winners too. Before I write more extensively on the sector allow me to point out a relative winner

City Union Bank

CUB is amongst the most profitable private sector banks in India, perhaps because it sticks to its knitting and provides basic banking services. The bank experienced some duress last year as a significant part of its exposure was to the textile sector which experienced volatility in cotton prices.

The Rupee will have a positive impact on textiles as imports will reduce and exports become more competitive thereby increasing total volumes for the sector. 

As a result textile merchants will experience and increased ability to service their debt and address any prior defaults. The bank will see an improvement in asset quality and therefore require lower provisioning. This should aid ROE and ROA (currently 1.6%)

Yesterday, RBI mandated banks to provide upto 0.8% on loans to corporate having unhedged foreign currency borrowings and provide 25% additional capital on their exposure. This fiat will increase cost of funds for banks who in turn will pass it to their clients. Larger banks will be the worst hit with such regulation as it increases capital requirements. A smaller bank like CUB may escape these measures with a minor impact as their primary clientele is small business.

As a result of these two events the disparity in CUB’s ROE and ROA compared to other banks will increase and could lead to an outperformace vis a vis the sector

Signing off

Sundeep