What explains the sharp fall in Private Banks in March?
Between Jan-20 and March-20, the Nifty Private Bank index lost 38%. What was more surprising was that 30% out of the 38% correction happened in the month of March. What explains this sell-off in private banks?
Economic slowdown worries
The Coronavirus has put a cloud over the global and Indian economic growth. IMF has lowered the global growth target by 40-50 basis points. Brokers and rating agencies are now lowering India’s Q4 GDP growth to below 4% and even the FY21 GDP growth is being revised downward by 60 basis points. This is likely to hit output, industrial credit demand and the income levels. All these could seriously hit credit demand, especially from the retail borrowers, where the private banks specialize. Bank credit could really take a hit.
Unsecured credit haunts
In a recent report lowering the targets of HDFC Bank, global investment banker Alliance Bernstein has raised serious concerns over the high unsecured credit in the books of private banks. Most private banks have relied on consumer loans to boost their books. This will not only be impacted by weak income growth but even repayment cycles are likely to get hit. Alliance has clearly pointed at a likely increase in the rate of delinquencies of consumer loans given out by private banks, which is a worry.
Yes Bank was a dampener
The Yes Bank episode happened in the early part of March and that actually dampened sentiments around private banks. While the more vulnerable private banks took deep cuts, the run on deposits became a concern across the private banking space. That explains why the private banks corrected so sharply in the month of March. Apart from the Yes Bank worries, there were also concerns over the cost of funds for private banks as well as their ability to keep NPAs under check. With concerns over consumption and spending, the impact was to be most pronounced on the private banking books.
Valuations are still steep
One can always argue that private bank valuations must have come to more reasonable levels. That is correct. For example, the P/E ratio of Indian private banks has come down from 41X to 20X in just the last 20 days. But the dividend yield even after the crash is just 0.60%. That does not give too much comfort at a time when the average dividend yield on the Nifty stocks has gone up to 1.85%. Most private banks have enjoyed steep price valuations but their dividend payouts have been extremely miserly. With growth likely to be tepid for some time, private banks will have to improve their dividend yields to keep the markets interested. Finally, it looks like sanity is back in valuations.