/Investors should focus on banks with a comfortable NPA level: G Chokkalingam

Investors should focus on banks with a comfortable NPA level: G Chokkalingam

G Chokkalingam, founder and MD, Equinomics Research & Advisory, prescribes a simple formula for investors looking for bets in the banking sector — Look for ones that have net NPA of less than 4 per cent with a net worth more than net NPAs. He spoke to ETMarkets.com at the recent ETMarkets Global Summit 2018.

What is your view on the NPA mess?
G Chokkalingam: It is very unfortunate that the frauds are happening at the peak of NPA issues for PSU banks. This reminds 2003 post drought situation in the Indian economy, which was the time when PSU banks had double digit NPAs. Now again, we have come back to double digit NPA and on top of it, these frauds have happened.

The very disturbing fact is that for many PSU banks, the financial net worth is less than the outstanding net NPA. If you have to make a provision for these fraud amounts, things are going to be pretty bad.

The banking crisis shows that for many PSU banks the business is not growing, the credit is either stagnating or de-growing. In this situation, what investors should do is that look for PSU banks which are still sitting on net NPA of say less than 4 per cent and where net worth is more than net NPAs so that there is an opportunity for the shareholders to benefit, and where the business is still growing. If you use these criteria, then definitely you have banks like Indian Bank and Vijaya Bank as they come on top of the table.

And also, the punishment meted out to these two banks along with other PSU banks is irrational because these banks are pretty good in terms of net NPAs, price to book value and credit growth. Similarly, even the old private sector banks were hammered. Some of them have come even below the adjusted book value. I would say this is also an opportunity for these kinds of banks because whenever a fraud happened in the financial market or the banking system, it only went and strengthened the system. It is very evident from the history.

Therefore, the investor should make use of this opportunity and stay away from the PSU banks which have net worth less than the outstanding net NPA and fraud amount and also the price to adjusted book value anywhere around 8 to 10. Those kinds of banks should also be avoided if the credit is not growing or de-growing. Then, focus on other sets of banks where as I said the net NPA is in a very comfortable zone and price to book value is less than or around say four times and credit is still growing. If you use this criteria, I am sure in the next one to two years, phenomenal wealth can be created in old private banks as well as PSU ones.

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Markets-The Economic Times