Banking sector this week: Investors cheer Q4 losses in hope that the worst may be past

Quarterly losses reported by large public sector banks, including country's largest lender State Bank of India, have been lauded by investors this past week in the hope that these banks have now identified all their problems and may start improving from here on.

This is despite the banking sector being embroiled in a series of frauds and recognition of non-performing assets (NPAs) as a result of the Reserve Bank of India’s circular on the framework for resolution of stressed assets, released on February 12.

The Nifty Bank has jumped over 7 percent in the last one month, despite a total of 13 banks (excluding Bank of Baroda and IDBI Bank) reporting a collective loss of Rs 44,250 crore, over four times the profits reported by the sector for the reporting quarter, which stood at Rs 10,869 crore.

On Friday, Bank of Baroda reported a net loss of Rs 3,102 crore, while IDBI Bank's loss widened to Rs 5,663 crore, taking the cumulative loss of 15 banks to Rs 53,015 crore.

Private banks score over government banks

A large number of private banks, led by HDFC Bank, are now more expensively valued than their public sector peers, given the sheer sizes of their market capitalisation.

For instance, SBI’s market cap, at Rs 2.38 lakh crore as on May 25, is less than half of HDFC Bank’s market cap at Rs 5.22 lakh crore, despite the former being the largest lender in the country.

For the quarter ended March, HDFC Bank topped the profitability charts with a net profit of Rs 4,799 crore. Meanwhile, Punjab National Bank's quarterly loss of Rs 13,417 crore was over 2.7 times HDFC Bank’s profit.

SBI reported a net loss of Rs 7,718 crore for the quarter under review as its provisions for bad loans and mark-to-market losses more than doubled in size. The strain on the bank's bottom line, however, seems to have been overlooked by the stock market.

Investors cheer in hope

Shares of SBI have risen over 10.7 percent since Tuesday, the day it announced its results, while those of PNB have shot up by over 11 percent since the fraud-hit bank declared its quarterly numbers on May 18.

This is primarily because a lot of bank chiefs, including SBI Chairman Rajnish Kumar called FY19 'a year of hope', given that most of the recognition of bad loans has already been completed and there is a higher focus on the growing retail segment and high-quality corporate assets.

The market expects government reforms to provide the much-needed support on the capital front.

Banks are now focusing on being risk-averse by diversifying their lending from troubled sectors such as infrastructure, power, textiles, etc. and targeting better-managed companies in growing sectors like roads, renewable energy and other government-backed projects.