With the Union Budget 2017 just around the corner, Banking stocks are on a roll. The Bank Nifty, the barometer of banking stocks, has gained 11% since its December low of 17655.55 on 26th to settle at 19585.25 on January 30th 2017 in the anticipation of budgetary stimulus to keep demons of demonetization at bay. This is as compared to 9% rise in the Nifty50 Index. Like all the other sectors, even banks have some hopes pinned on the upcoming Budget.
Hopes from Budget:
Below are six concerns that market participants hope FM Arun Jaitley will address in Budget 2017:
- Market expects the Government to offer benefits to improve digital transactions. To increase digital infiltration, the government may mull over tax exemption for customers conducting transactions digitally or electronically over a certain limit and for the vendors and merchants exceeding a certain threshold in value of digital transactions.
- The note ban has resulted in downpour of deposits in the banks, which would only be a liability as long as the credit growth does not pick up. Data showed that credit demand decelerated to a multi-decade low of 5.1% for the fortnight ended December 23, in spite of 175 bps reduction in repo rate since January 2015. For the banking sector to see credit resurgence, the industrial credit has to pick up. That can be done only when capex is enhanced by the government and the private sector.
- Experts said that PSU banks require around Rs 1.8 lakh crore capital over the next four years. Under the Indradhanush plan, the government has issued Rs 70,000 crore. They expect an upward revision to the capital infusion in Budget 2017, as there exists a deficit of Rs 1.1 lakh crore factoring in the Indradhanush plan.
- There are hopes for tax rebate on the bad loan provisioning as the RBI’s asset quality review has led to a sharp rise in provisions. Banks get only limited tax relief which is up to 7.5% of total income on the same. RBI’s Financial Stability Report noticed that the combined bad loans in scheduled commercial went up to to 12.3% of total assets in September 2016, from 11.5% in March 2016.
- Although the Government has set up Bank Board Bureau to help banks raise capital, nothing certain has been announced so far. Besides, for an effectual divestment to raise significant funds, the government would require revising of Banking Companies Act that may pave way for diluting stake in PSU banks to below 51%. Although Finance Minister Jaitley did signified in his Budget 2016 speech to consider reducing the stake in IDBI Bank to less than 50% from 80.2%, he hasn’t gone for it as yet. Any announcement on stake dilution will be much anticipated in Budget 2017.
- The asset quality of the banking sector has worsened sharply due to compounding problems in the commodity sector. With commodity prices recuperating, Government’s push to infrastructure may do the trick to improve profitability of banks. A higher push in Infrastructure could help create additional demand for steel and other metals, which will indirectly benefit the banking sector, as the core companies would be able to service their debt.
Bank Stocks performance:
City Union Bank share price gained 10%, Lakshmi Vilas Bank share price moved up by 2% and Indian Bank share price surged 33% since December 26th and had been the top gainers.
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