SBI: FY20 expected to be the big year of recoveries for the banking sector
Update on the Indian Equity Market:
On Tuesday, NIFTY closed marginally higher at ~11,940 points (+0.5%). In the sector-wise performances, PSU BANK (+3.9%) was the best performing sector while METAL (-0.9%) was the worst-performing sector. Amongst the NIFTY 50 Stocks, INFRATEL (+11.0%), BHARTIARTL (+8.7%), AXISBANK (+3.7%) and RELIANCE (+3.6%) were the top gainers while YESBANK (-2.5%), M&M (-2.1%), ZEEL (-2.1%) and TCS (-2.0%) were the worst performers.
SBI: FY20 expected to be the big year of recoveries for the banking sector
Key takeaways from the interview of Mr Rajnish Kumar, Chairman of State Bank of India (SBI); dated 19th November 2019 on CNBC-TV18:
- The Supreme Court recently set aside the July 4 order of the National Company Law Appellate Tribunal (NCLAT) approving ArcelorMittal’s Rs 42,000-crore bid for acquiring debt-laden Essar Steel. The bench clarified that financial creditors enjoy primacy and the adjudicating authority cannot interfere with the decision approved by the committee of creditors.
- Talking about the Supreme Court (SC) decision, Mr Kumar said that it was a big positive and he expects the Essar deal to conclude by the end of November 2019.
- He is of the opinion that this was a landmark judgement, upholding the validity of the rules, laws, as per the Insolvency and Bankruptcy Code (IBC) Act and the recent amendments carried out by the Government of India (GoI) almost in entirety. SC made only one change; it removed the mandatory 330-day period. In case of unusual circumstances, National Company Law Tribunal (NCLT) can relax or allow the time for a resolution plan to be implemented even beyond 330 days.
- Mr Kumar expects FY20 to be the year of recoveries for the banking sector with Essar Steel (~₹ 42,000 cr) judgement and the likes of Bhushan Power and Steel (~₹ 20,000 cr), Ruchi Soya and others (where the banking system’s exposure to each is ~ ₹ 5,000-8,000 cr) being lined up for under IBC.
- The government introduced rules to resolve cases involving finance companies under section 227 of the IBC. The Reserve Bank of India (RBI) has been vested with the power and, in consultation with the concerned ministry in the government, they can notify which company to be taken to the NCLT.
- No financial creditor can take any Non-Banking Financial Company (NBFC), Housing Finance Company (HFC) to NCLT. The power vests with the regulator (the RBI, in this case) to identify in consultation with the central government. It will take the matter u/s 227 to the NCLT and appoint an administrator. Once the NCLT has admitted the case, then the committee of creditors’ concept will come in. The rules also talk of an advisory committee. There will be clarity on this when a case is actually taken up.
- Coming back to the Essar judgement, Mr Kumar mentioned that SBI has fully provided for the outstanding amount. Thus, any recovery will directly be recorded in the quarters’ profit and loss statement.
Consensus Estimate (Source: market screener and investing.com website)
- The closing price of SBIN was ₹ 327/- as of 19-November-19. It traded at 1.3x / 1.2x / 1.0x the consensus Book Value for FY20E / 21E / 22E of ₹ 251/ 280/ 319 respectively.
- Consensus target price of ₹ 366/- implies a Price to Book multiple of 1.1x on FY22E Book Value of ₹ 319/-.