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Consolidation in Indian banking sector risky: Moody’s

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Consolidation in Indian banking sector risky: Moody's

Chennai: The multiple downside risks in the proposed consolidation in the Indian public sector banking (PSB) space far outweighs the potential benefits, said global credit rating agency Moody’s Investors Sevice.

In a statement issued on Tuesday, Moody’s said the proposal to consolidate the country’s public sector banks (PSBs) creates risks that — in the current weak economic environment — could offset the potential long-term benefits.

“India’s banking system has witnessed an increase in stressed assets since 2012, with the result that no PSB currently has the financial strength to assume a consolidator role without risking its own credit standing post-merger,” Moody’s Vice President and Senior Analyst, Alka Anbarasu said.

“Barring significant government support to boost the banks’ capitalisation, we believe the risks arising from the potential consolidation currently outweigh the potential longer-term benefits,” added Anbarasu.

Moody’s has released a report on Indian banks entitled ‘Banks — India: Consolidation of Public Sector Banks Will Face Challenges Under Current Conditions’.

Referring to Union Finance Minister Arun Jaitley’s budget speech, Moody’s said the consolidation in the Indian PSB space is gaining policy momentum.

Recently, the State Bank of India (SBI) announced its decision to merge six banks with itself-including five of its associate banks.

“From a credit perspective, industry consolidation would strengthen the banks’ bargaining power, help save costs and improve supervision and corporate governance across the banking system,” Moody’s said.

These potential benefits, however, are outweighed by multiple downside risks, the rating agency added.

According to Moody’s, the banks’ weakened metrics since 2012 and weak performance mean that many have difficulties meeting minimum regulatory requirements without regular capital injections from the government.

As a result, few public sector banks have the excess capital required to acquire meaningfully sized peers.

Adding to this financial pressure, all listed PSBs are trading at a significant discount to their book value, limiting their ability to attract external capital to support acquisitions.

“Therefore, Moody’s believes government support will be a crucial driver of the credit outcome of potential mergers, particularly in the form of the equity capital required to shore up capital buffers,” the rating agency said.

As to the challenges in consolidation in the PSB sector Moody’s cited the potential opposition from employee unions, which could hamper merger efforts and drive up costs.

For example, SBI estimates that its merger with the associate banks will cost up to Rs 30 million due to differences in employee pension schemes.

The Indian government’s ultimate aim is to reduce the number of PSBs to about eight to 10 from the current 27.

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Nifty, Bank Nifty gain for 5th straight week

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The NSE Nifty along with the broader market gained for the fifth week in a row and even the Bank Nifty recorded gains for the fifth straight week — surpassing the 30,000-level.

Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services, said the RBI upgraded its GDP target to -7.5 per cent (-9.5 per cent earlier) for the current financial year and kept interest rates steady given the high inflation. The overall accommodative stance of the RBI to support economic growth boosted sentiments. Nifty Auto and Metal also posted best week since June 7.

The Indian equity market touched another new high, led by gains in banking stocks after RBI`s policy outcome. Nifty rallied 125 points (+1.0 per cent) to close at 13,259 while Sensex surged 447 points higher (+1.0 per cent) at 45,080.

The broader market also ended in green with both Nifty Midcap 100 and Nifty Smallcap 100 up +0.4 per cent each. All the sectors closed in green except energy which ended with marginal loss of -0.1 per cent. Banks were the biggest gainers, up 2.1 per cent, following positive commentaries from the RBI. It was followed by FMCG, financials, metals, pharma, realty and infra which were up in the range 1-1.4 per cent.

“On the domestic side, Nifty along with the broader market gained for the fifth week in a row. Even Bank Nifty recorded gains for the fifth straight week – surpassing the 30,000-level, after the RBI upgraded its GDP target to -7.5 per cent (-9.5 per cent earlier) for the current financial year and kept interest rates steady given the high inflation,” Khemka said.

Deepak Jasani, Head – Retail Research, HDFC Securities, said that Indian benchmark equity indices rallied and closed at another record high after the RBI kept rates on hold and did not announce steps to withdraw liquidity in the system. It raised the growth forecasts as well as inflation forecasts. At close, the Nifty was up 124.60 points or 0.95 per cent at 13,258.50. The Nifty rose for the fifth consecutive week, rising 2.23 per cent for the week.

Volumes on the NSE were higher than recent average. Among sectors, banks, metals, infra, realty, pharma and FMCG indices rose the most, while energy index ended in the negative.

“Nifty closed the week up for the fifth consecutive week. While the trigger of RBI policy is out of the way, markets globally now look forward to rising chances of an early US economic stimulus package. Post a good weekly close, we may see some more upside in the early part of next week,” Jasani said.

Vinod Nair, Head of Research at Geojit Financial Services, said that during the week, the markets have been testing new highs each day supported by better-than-expected GDP data, advancements in vaccine and RBI`s decision to keep its rates unchanged and maintain an accommodative stance. The banking and finance sector remained the focal point during the week due to major events like moratorium hearing, MPC meet and RBI`s curb on HDFC Bank.

The market has also witnessed a shift in investor preference to broader markets led by rally in mid and smallcap stocks.

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