After Initial Euphoria, Market May Focus On Core
Question Of PSBS Earnings Boost As PSBS Recap Does Not Solve The NPA Or Lack Of
Eligible/Quality Corporate Borrowers In The System
Market Mantra: 25/10/2017 (09:00)
SGX-NF: 10360 (+140)
For the Day: updated at 09:10
Key support for NF: 10325-10275/10225
Key resistance for NF: 10380-10425/10455
Key support for BNF: 24850-24500
Key resistance for BNF: 25100-25250
Hints for positional trading:
Technicals indicate that, NF has to sustain over 10380 area for
further rally towards 10425/10455-10495 & 10585-10625 area in the short
term (under bullish case scenario).
On the flip side, sustaining below 10360 area, NF may fall
towards 10325-10275 & 10225-10180/10150 area in the short term (under bear
case scenario).
Similarly, BNF has to sustain over 25100 area for further rally
towards 25250-25500 & 25600-25775 area in the near term (under bullish case
scenario).
On the flip side, sustaining below 25050 area, BNF may fall towards
24850-24500 & 24300-24000 area in the near term (under bear case scenario).
As par early SGX indication, Nifty Fut (Oct) may open around 10360, surged by almost 140 points
at another milestone high on Govt’s “innovative” recap plan for the PSBS and
certain other fiscal stimulus measures in infra/road building without hurting
fiscal discipline too much.
Although the plan of Rs.2.11 tln recap is certainly “unprecedented”
and almost half of the actual recap requirement of Rs.4.50 tln, it’s may be
more of a accounting jugglery or some types of financial engineering.
As par preliminary indication, Govt will issue certain types of
special recap bonds for Rs.1.35 tln to the PSBS and they will subscribe it as
part of their “investment portfolio”, Govt will get the cash and redeploy it in
PSBS as some types of capital buffer. Banks/PSBS are now flushed with DeMo
funds and thus there is no problem of cash-flow (liquidity) and basically Govt
is trying to support the PSBS (B/S) on the “strength” of this DeMo fund.
For rest of Rs.0.76 tln, Govt has already provided Rs.0.16 tln
through budgetary provisions out of its existing “Indradhanush” project and
thus PSBS now has to arrange rest Rs.0.60 tln of their own from the market.
Thus, Govt is not infusing any additional capital of its own to
the PSBS at this moment; it will issue special non-marketable recap bonds to
the PSBS (like erstwhile fertilizer bonds) and PSBS will basically use it as
their capital buffer for huge NPA provisioning/IBC/NCLT cases, BASEL-III norms,
thus increasing their lending capacity or strengthen their B/S.
Govt will pay the recap bond interest to the holders of the
bonds (PSBS) and that amount (around Rs.0.8-0.9 tln) will be treated as an
expenditure and may affect the fiscal deficit question. Also, as par global/IMF
accounting rule, such recap bond is revenue neutral and thus will not affect
the fiscal deficit; but as par Indian accounting rule, this is not revenue
neutral at all and thus will affect the fiscal deficit. As of now, Govt &
PSBS are following Indian accounting rule!!
All these PSBS recaps efforts may be a signal by the Govt to
start corporate/MSME lending in a big way to stimulate private capex and dig
out the economy from its biggest slumber in the last three years ahead of key
state elections & the 2019 general election.
Economic slowdown after DeMo & GST may become a political
risk for the Govt/BJP, if not addressed correctly. Thus Govt is now trying to
fix it after indirect acknowledgment of the reality, despite ongoing “chest
thumping”.
But the problem may be that there
is significant lack of eligible & quality corporate/MSME borrowers as of
now amid stressed B/S; liquidity or even Bank’s B/S was not an issue for
big bang corporate/MSME lending even before DeMo.
Thus structural resolution of NPA issues is urgently required.
Although market is expecting quick settlement of stressed assets with adequate
hair cuts by the banks after recap, Govt may not favour such clean up of B/S so
easily as it will be a political issue going forward. Both Govt & banks
want resolution of NPA & not liquidation.
Thus, unless & until the NPA mess is not resolved
satisfactory and banks/PSBS start to lend again in a big way to quality & eligible
borrowers (corporate/MSME), there will be no visible improvement in earnings.
Also, such recap bonds may be equity dilutive, if converted into equity capital
of the PSBS eventually and thus there may be further doubt about ultimate EPS
boost of the PSBS.
Global cues today is muted amid US political squabbling regarding the
passage of tax reform bill coupled with reports that most of the RNC members
are favoring Taylor as next Fed Chair. Taylor is a known hawk due to his “Taylor’s
rule” and open criticism of Fed’s QE policy and thus appointment of Taylor will
make the USD more strong going ahead.
A strong USD is not good for US market and thus it’s showing
some signs of nervousness coupled with some uncertainty about passage of US tax
reform bill and other deregulation measures due to ongoing US political drama
involving Trump & some of his own senior RNC colleagues/senators.
Overnight US market (DJ-30) closed around 170 points up (+0.72%) solely on strength
of earnings boost by CAT (+5%) & 3M (+6%), which has contributed almost 120
points of the 170 points rally in DJ-30; S&P-500 closed almost flat
yesterday.
SGX-NF
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