Budget 2013: Banking Sector To Take A Further Beating

The Union Budget announcement of 2013-2014 proved to be negative for the banking space. There was not a single positive point in the FM’s speech, which could bring cheer to the sector. As a result, the banking stocks plunged heavily, taking the overall indices lower. The BSE Bankex closed down almost 500 points (3.6%), slightly below the 13700 levels. The broader index, Sensex, also closed the day down by 300 points (1.52%) at the 18861 levels.

The key Budget announcements impacting the banking space are as follows:

• Public Sector Banks (PSBs) are expected to receive capital infusion of Rs 14000 crore in FY2014 to meet the capital requirements in accordance with the Basel III guidelines. We believe that the estimation of these funds is very low, as the industry expected capital infusion of around Rs 20000 crore. This would result into inadequate Capital Adequacy Ratio (CAR) for most of the public banks, which would find it very difficult to comply with the RBI’s minimum required norms on CAR.
• The government emphasised discoms to go for financial restructuring, which would help them to come out of their heavy losses. This would result into more restructuring, resulting in the banks providing higher provisions in their books. They may also witness pressure on the asset quality front, which is obviously a negative for the banks.
• The interest subvention scheme for short-term crop loans will be continued and farmers who repay loans on time will be able to get credit at 4% p. a. The scheme was applicable to public sector banks, regional rural banks and co-operative banks earlier, and the same is now applicable to private sector banks, which will is not a favourable development for them. The scheme will lead to lower yield on advances to a certain extant and would impact their Net Interest Margins (NIM). Further, all branches of public sector banks are expected to have ATMs by the end of March 31, 2014. This would increase the costs for most public banks, which would be expanding their ATM networks, resulting in a rise in expenses for FY2014. The cost-to-income ratio of the public sector banks may move northwards, which is not a good sign for them.
• The fiscal deficit figure for FY2014 is estimated at 4.8%, which though positive, has already been discounted in the markets. We believe that one needs to use a wait and watch strategy to see how this actually pans out.
• The net market borrowing for FY2014 is estimated at Rs 484000 crore, which will help to finance the economy. This is a marginal increase from last year’s budget estimates of Rs 479000 crore. If the government sticks to it, we may see the bond yields going down. In today’s trade, the bond yield moved upward, which shows that the market is expecting this limit to exceed. This will have negative impact on bank’s earnings from treasury and especially to the PSBs.
• Further, the move to increase the surcharge on taxable income exceeding Rs 10 crore from 5% to 10% would impact banks.