Thursday, 19 April 2018

Nifty skids despite positive global cues as RBI denied any CDR relief and launched surgical strike on corporate NPA

Market Wrap: 18/04/2018

NSE-NF (April):10551 (-0.25; -0.00%)

NSE-BNF (April):25143 (-192; -0.76%)

SPX-500: 2709 (+2; +0.08%)

Market Mantra: 19/04/2018

Updated: 07:40

SGX-NF: 10585 (+34; +0.32%)

Expected BNF opening: 25230 (+0.35%)

SPX-500: 2712 (+2; +0.07%)

(Gap-up opening on positive Asian cues amid higher oil on Saudi Jawboning, higher USD and hopes of a trade pact/TPP as Trump meets Abe; US market closed mixed on a slump in IBM amid muted earnings but helped by energies)

March-Fut (Key Technical Levels)

Support for NF:


Resistance to NF:


Support for BNF:


Resistance to BNF:


Support for SPX-500:


Resistance to SPX-500:


Technical View (Positional-Nifty, Bank Nifty, SPX-500):

Technically, Nifty Fut-I (NF) has to sustain over 10615 for a further rally towards 10655/10675-10725/10765-10815/10865 in the short term (under bullish case scenario). 

On the flip side, sustaining below 10595 NF may fall towards 10540/10515-10475/10430/10400-10370/10340 in the short term (under bear case scenario).

Technically, Bank Nifty-Fut (BNF) has to sustain over 25500 for a further rally towards 25655/25775-25850/26050-26150/26300 in the near term (under bullish case scenario).

On the flip side, sustaining below 25450, BNF may fall towards 25200/25050-24950/24800-24600/24400 in the near term (under bear case scenario).

Technically, SPX-500 now has to sustain over 2730 for a further rally towards 2750/2765-2785/2805 in the near term (under bullish case scenario).

On the flip side, sustaining below 2720, SPX-500 may fall towards 2700/2690-2675/2655-2640-2610 in the near term (under bear case scenario).

Valuation metrics:

Nifty-50: 10526; Q2FY18 EPS: 410; Q2FY18 PE: 25.67; Avg FWD PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360

Bank Nifty: 25102; Q3FY18 EPS: 820; Q2FY18 PE: 30.61; Avg FWD PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220

The Indian market (Nifty Fut/India-50) closed around 10551 on Wednesday, almost unchanged but skids from the day high of around 10597 on reports that RBI will not oblige to provide any CDR (corporate debt restructuring) relief to the banks and it denied to alter any provisions of its February circular for the same. RBI defends 180-day time given to resolve stressed assets contrary to the earlier market expectation that it may be extended by another 180 days through the NCLT route.

As a reminder, banks and the overall market rallied in the last few weeks on the perception that RBI will pay heed to the IBA (Indian Banks Association) request to alter some provisions for this CDR circular. As a result, Bank Nifty tumbled on Wednesday and Nifty Fut made a low of around 10520 on the RBI denial, but it recovered and closed almost flat in the closing hour rally in FMCG/ITC on hopes of a normal monsoon this year.

Banks sink on RBI’s surgical strike on corporate NPA (and frauds):

RBI deputy governor Vishwanathan has defended the 1-day default clause of 12th Feb circular saying “default is a lagging indicator and not a leading indicator of financial stress, especially for the large corporate loans and lenders need to be proactive”. As RBI does not relent on corporate NPAs vide its Feb circular and ups its ante on the excessive corporate leveraging, banks stocks sink. The market is concerned that this Feb NPA/CDR circular will dig out more NPA under the carpet, which was kept hiding in the disguise of various CDR for years after years.

RBI deputy governor said, “banks often avoid recognizing big stressed assets; Feb 12 circular aims to cut default arbitrage”. RBI also warned against herd mentality of bankers to grow retail loans and said “retail loans not a panacea; risks need to be assessed and priced. For the small borrower/MSME who may not have the wherewithal to bring funds swiftly in the event of non-payment by clients, the framework makes an exception. The search for that perfect time for a long overdue reform can become a never-ending exercise”.

The RBI deputy governor further added that “An early identification of stress & loan modifications in response would provide sufficient time for lenders to put in place the required resolution plan. One has to note that default in payment is a lagging, not leading indicator of the financial stress of a borrower.  The idea is to nudge lenders & borrowers to take timely corrective action so deterioration in the asset quality is avoided”.

RBI deputy governor-“What the revised framework does is to enjoin upon the banks as creditors to enforce their contracts or renegotiate their contracts with their borrowers, so that they are not in default in the first place. Efforts by lenders & borrowers have been to avoid the account has to be de jure classified as NPA, notwithstanding the de facto status. So far, defaults on bank borrowings have not attracted similar reactions, as yields on the bonds do”.

RBI deputy governor- “February 12 circular aims to cut default arbitrage; will issue regulatory norms for credit rating agencies under new framework and the new framework seeks to nudge bankers to identify bad assets & to start resolution early in the cycle. Banks often avoid recognizing big stressed assets; Feb's debt resolution framework gives banks flexibility to resolve the bad debt. Debt recast schemes/CDR was needed in absence of bankruptcy code and now need focus on NPA stock along with the flow of NPAs”.

Thus, it’s clear that RBI will treat even a 1-day corporate default as a sign of financial stress and will not entertain any request for any types of CDR available earlier as the IBC/NCLT resolution mechanism is now available and will be the only instrument through which corporate stress (NPA/NPL) will be addressed. Banks are concerned that this will not only lead to a sudden surge in NPA provisions but may also clog the NCLT system, which is judicial in nature.

RBI will not delay further it’s war on the corporate NPA and will act pre-maturely or pro-actively rather than waiting for years for the NCLT resolution as it will eventually make the valuation of the underlying asset much lower than the loan obligation. This is now clearly visible in many of the big corporate NPA resolution effort at the NCLT.

For decades, Indian banks, be it public or private were more pro-active in hiding the big corporate NPA by providing more and more loans to cover the earlier loans obligation rather than actual resolution and the whole system was working like a great “Ponzi scheme” (like paying the SBI credit card with ICICI credit card and so on). RBI and the government will now ensure deleveraging of the stressed corporates in the line of China/PBOC rather than kicking the can down the road.

On Wednesday, Nifty was supported by ITC, Wipro, Ultratech Cement, ZEEL, ONGC and others by almost 42 points (31+11), while it was dragged by HDFC Bank, Axis Bank, RIL, HDFC, Kotak Bank, Indusind Bank, ICICI Bank, M&M, IOC, Titan and others by around 56 points (40+16) cumulatively.

Overall on Wednesday, Indian market was helped by FMCG, media (ongoing IPL and forthcoming election season may be helpful for ads), metals (US sanctions on a Russian aluminum co), reality, consumption, and infra to some extent, while it was dragged by banks & financials, automobiles, techs, pharma, energies.

Global cues were positive during Indian market hours on Wednesday:

US stock future (SPX-500) was up by 0.33% at a 3-1/2 week high and European stocks were up by also 0.33% at a 2-1/2 month high.  An upbeat start to Q1CY18 corporate earnings season was boosting stock prices with Morgan Stanley up nearly 2% in pre-market trading after it reported stronger-than-expected Q1 revenue.  Also, reduced geopolitical tensions on the Korean peninsula were lifting global stock prices after President Trump said Pompeo met with North Korean leader Kim last week and a "good relationship" was formed. 

Asian stocks closed mostly higher: Japan +1.42%, Hong Kong +0.74%, China +0.80%, Taiwan +0.35%, Australia +0.34%, Singapore +1.70%, South Korea +1.27%, India -0.18% (Sensex). 

China's Shanghai Composite recovered from a 10-3/4 month low and moved higher after the PBOC cut the reserve requirement for selected banks and as Chinese semiconductor stocks rallied on speculation the government may step up support for the sector after the US banned China's ZTE Corp from buying American components for 7-years. 

Japan's Nikkei Stock Index climbed to a 1-1/2 month high as trade tensions eased as early signs of the Trump-Abe meeting showed no new trade demands from the US; also some early drops in Yen have helped the market.

Asian equity markets were mostly higher as the region got a tailwind from overnight US session where sentiment was lifted by encouraging earnings; gains were led by the Nasdaq after Netflix shares surged on strong subscriber numbers.  A higher oil and metals have also helped the market.

ASX-200 was positive but with upside capped by weakness in the largest weighted financials sector amid an ongoing Banking Royal Commission grilling and after CYBG flagged a GBP 202 mln pre-tax charge.

Hang Seng and Shanghai were underpinned at the open in reaction to the PBOC’s surprise 1% RRR cut for most banks and a CNY 150 bln Reverse Repo operation. US Commerce Department launched a probe on imports of some types of steel wheels from China, while it was also said to have made a preliminary finding that aluminum sheet imports from China benefit from unfair subsidies.

The European equities have taken the lead from Asia and US with all major bourses in the green as earnings come into focus. The FTSE 100 was outperforming, fueled by the weaker GBP as the UK inflation rate drops to the lowest in a year. Almost all sectors were resting in the green, with materials outperforming on the firmer base metal prices while consumer discretionary lagging behind.

But, European stocks also turned volatile driven by steep declines in the auto/ tire sector, led by tire makers after a bellwether issuing a profit/guidance warning. The catalyst was Continental which cut its forecast for FY adjusted EBIT margin by a small margin to just above 10% from the previous view of around 10.5%, citing negative currency impact and inventory revaluation, mainly in the tire business, sending its shares sliding 4.3%, and dragging the rest of the sector with it.

Oil closed higher on Tuesday amid Kuwaiti Oil Minister’s comment that OPEC and its allies such as Russia will consider maintaining their production cuts beyond the end of the year when they meet in June to assess the market. Crude oil prices were also undercut by a stronger dollar index and reduced Middle East tensions. But oil is also getting support by the continued narrative of middle-eastern tensions with the latest source reports suggesting that weapons inspections have been delayed in Douma, Syria amid gunfire on the site.

The dollar index on Tuesday closed higher on comments from Treasury Secretary Mnuchin who said President Trump's comments Monday about Russia and China devaluing their currencies was a "warning shot" and it was not about wanting a weak dollar. There was also weakness in EURUSD after the German Apr ZEW survey expectations of economic growth fell unexpectedly amid Trump’s trade war rhetoric and a higher EUR hovering around 1.25.





No comments:

Post a Comment