BlackRock Finds Value in Battered State-Owned Indian Banksby
Bad-loan concerns priced into share values, CIO Naganath says
State Bank, Bank of Baroda trade below their net assets
BlackRock Inc. has turned more bullish on India’s state-owned lenders after concern over bad loans sent their valuations to a record low.
“The non-performing assets issue has been debated and analyzed for quite some time now, and all the worries around it are in the stock prices,” S. Naganath, Mumbai-based chief investment officer at DSP BlackRock Investment Managers Pvt., the Indian venture of the world’s largest money manager, said in an interview on Thursday. “If I take a three-year view, I would be very bullish on the public sector banks."
The worst start to a year for Indian equities since 2011 has left a gauge of 12 state-owned lenders trading at 0.52 times its book value, an all-time low, data compiled by Bloomberg show. Indian lenders are grappling with rising bad loans amid the highest stressed-debt ratio in at least 14 years as a slower than expected revival in Asia’s third-biggest economy erodes borrowers’ capacity to service debt. The central bank has set a March 2017 deadline to help bolster balance sheets by increasing provisions.
The money manager held shares of State Bank of India and Bank of Baroda, the nation’s biggest state lenders, in the DSP BlackRock Top 100 Equity Fund as of Dec. 31, according to data compiled by Bloomberg. Banks made up a quarter of the 35 billion-rupees fund, which has returned 13 percent annually in the 10 years through Jan. 29. That compares with the 11 percent yearly gain for the S&P BSE 100 Index during the period.
The proportion of Indian lenders’ stressed assets, which include restructured and soured loans, to total advances reached a 14-year high of 11.3 percent at the end of September, data compiled by the Reserve Bank of India show. State-owned banks recorded the worst capital-adequacy ratios among all financial institutions, the RBI data show.
Market Value Shrinks
The NSE Nifty PSU Bank Index has lost 43 percent of its market value in the past 12 months, twice as much as the NSE Nifty Bank Index, which includes HDFC Bank Ltd., India’s most valuable lender. The selloff in the government-run lenders has shrunk the combined market value of the 12 banks in the PSU gauge to $33 billion, less than HDFC Bank’s $39 billion.
HDFC Bank had a capital adequacy ratio of 15.9 percent at the end of December and a gross bad-loan ratio of 0.97 percent. That compares with 12.7 percent and 5.1 percent, respectively, for India’s banking system as of Sept. 30, latest data available from the RBI show. The lender’s shares have risen 22 percent annually in the 10 years through Jan. 29, compared with the 3 percent yearly return for the Nifty PSU Bank gauge.
State Bank of India, the nation’s largest, has slumped 43 percent in the past year. The stock is valued at 0.7 times its net assets, compared with 4.2 times for HDFC Bank, data compiled by Bloomberg show. Bank of Baroda, the second-biggest by assets, has tumbled 30 percent in the period and trades at 0.6 times its book value. Both lenders are due to post their fiscal third-quarter earnings next week.
“There may still be some more provisioning to be done, which may impact the earnings of banks in this quarter,” Naganath, who oversees $5.8 billion in assets, said. “The stock prices reflect those concerns for private and public-sector banks, especially the latter.”