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Syndicate Bank And The Hidden Opportunities Of PSBs

02/02/2016 11:27 AM IST | Updated 15/07/2016 8:26 AM IST
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There's one sector in India that continues to be gripped by short-sellers: public sector banks (PSBs). As Reserve Bank of India (RB) governor Raghuram Rajan calls out for banks to clear their balance sheets of stressed assets, without offering a firm solution, the market has grabbed that opportunity and has started hugely short-selling state-owned banks -- India's Nifty PSU bank index hit a 52-week low recently.

Much of India's middle-class trusts PSBs, when it comes to their savings accounts. Similarly, middle-class retail investors have the same faith in PSB stocks. The fall has, therefore, again shaken up investors' confidence in the stock-market. This situation is indicative of the failures of policy-makers and demonstrates regulators' lack of basic minimum foresight.

Syndicate Bank doing much better than ICICI. Yes, this is a fact -- despite the market continuing to penalise Syndicate Bank, and regardless of the media's shallow analyses...

Lack of foresight because policy-makers (Ministry of Finance) and regulators (RBI) should have first worked out a detailed, comprehensive solution to this problem, which is essentially an inherited legacy. Rather than doing so, the RBI governor started making excessive noise on it over the last few months (at a time when global commodity prices have been at their multi-year lows), stressing asset quality further.

There should have first been an adequate injection of capital, much like China did repeatedly with its four largest state-owned banks. But where China injected literally hundreds of billions of dollars, in India a paltry amount of Rs 70,000 (hardly $11 billion) crore has been promised over next four years.

January, furthermore, saw an extremely volatile downside stock market. Short-sellers grabbed that opportunity at the cost of marginal retail investors, as government, SEBI and RBI made empty promises, or pleaded helplessness. However, that is usual in a country like India where citizens, farmers or investors are left to their own devices.

Coming back to the dog-eat-dog world of the market, on 28 January, Syndicate Bank, a mid-sized PSB came out with its numbers as did India's largest private sector bank in terms of balance sheet, ICICI bank.

A comparison of these two results shows Syndicate Bank doing much better than ICICI bank. Yes, this is a fact -- despite the market continuing to penalise Syndicate Bank, and regardless of the media's shallow analyses about this bank's reported loss. A quick comparison:

Syndicate Bank's stressed assets as of December 2015 stood at 8.38% (slide 8, restructured STD down from 4.58% in Dec'14 to 3.77% in Dec'15, compensated for higher GNPAs), unlike ICICI's: "For ICICI Bank, stressed loans of all shapes and forms (NPA, restructured, 5/25 and SDR) jumped 22 per cent over the previous quarter says Ambit. They now stand at 8.9 per cent of loans versus 7.8 per cent in the previous quarter." ICICI bank reported coverage ratio 53.2%, all stressed assets not yet disclosed, whereas Syndicate Bank's coverage ratio is at 58.67%, all seemingly disclosed and future capital gain taxes accounted for. The notional loss reported by Syndicate Bank is purely an accounting technique.

The present market situation, created by the RBI and by the ineffectiveness of SEBI and government communication, presents an excellent opportunity to grab select few PSBs at extreme low valuation.

India's public sector banks have come under huge attacks by short-sellers since the RBI started making a noise about it, asking banks to clear balance sheets in two quarters (remember: ECB chief Draghi reminded banks in Greece that it takes years). India's markets are shallow. As of now, if one removes government shareholding in Syndicate Bank and that of LIC, India's largest state-owned insurance company, total shorts in Syndicate bank to free-float is more than 6%. Stocks are easily manipulated by operators, more so when the environment is shaky, as it has been in January 2016.

Syndicate Bank has accounted for additional provisions and taxes for the next quarter, as reported by ET on its analysts' meet. ICICI Bank remains opaque here too, signalling all is not yet clear. And it is good to see India's PSBs changing as this happens to be the first analyst-meet done by Syndicate Bank, post its results, to improve disclosure and transparency.

Syndicate Bank is quoting at a price to book of 0.3 vs ICICI's 1.6. Syndicate Bank is government backed. And most importantly, when everyone in India is talking about 7th pay commission and consumer discretionary stocks, PSBs directly benefit from it. Most government employees, beneficiaries of the 7th pay commission, have salary account/savings account with public banks only, giving PSBs more access to cheaper savings/deposits.

As most other PSBs results are yet to come and are likely to be much worse than Syndicate Bank's, it is quite possible that operators have built-up shorts in Syndicate Bank. With every other future PSB quarterly result being out, the plan of every operator and short-seller is to hammer Syndicate Bank further down as delivery volume are negligible with circular sell-buy trades. However, the latest results clearly show Syndicate Bank remains a crying buy, even if Indian business media and analysts, in general, try spreading canards against all public sector banks on stressed assets.

Moody's investor service also came up with an analysis on why India's banks, more so the PSBs, have been paying the price for bad debts accumulated back in earlier years, unlike that of China, suggesting fresh NPAs are slowing down. India's federal government has also reiterated on the need for a funds injection to recapitalise these PSBs by allocating more than what has already been promised. The present market situation, created by the RBI and by the ineffectiveness of India's SEBI (equivalent of SEC) and government communication, presents an excellent opportunity to grab select few PSBs at extreme low valuation, for significant returns within two-three quarters. So far short-sellers have been winning the game, but lately they have taken it too far with Syndicate Bank.

Syndicate Bank, in that pack, remains the best bet -- even better than India's largest bank , SBI, having a balance sheet size of around six times of that of Syndicate Bank. SBI surely remains the best proxy of India's banking sector. NPAs/stressed assets in SBI, going by its September quarter report (Gross NPA 4.15%, Net NPA 2.14%) are likely to be much worse in December-quarter than Syndicate Bank's December quarter (4.61% and 3.04%), if one goes by what ICICI Bank reported in the same quarter. SBI quotes at 1.09 of price to book, unlike around 0.3 of Syndicate Bank.

Full Disclosure: I hold long positions in Syndicate Bank and plan to accumulate more at current/lower prices. As most of India's media/analysts don't do a good job, markets are shallow, and I take this message out through HuffPost. The opinions here are of personal, and market investments are subject to market risks. Any investor should do his/her own study, or seek professional advice, before making any investment/trade decisions on any stocks mentioned in this article.

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