Nifty Surged as Banks Jumped Amid Favorable SC Verdict on COVID Loan Moratorium

Nifty Surged as Banks Jumped amid Favorable SC Verdict on COVID Loan Moratorium Cases, But Negative Global Cues may Drag the Indian Market Early Wednesday

India’s benchmark stock index Nifty 50 (NSEI) closed around 14814.75 Tuesday, surged almost +0.53% despite negative global cues as banks surged amid favorable SC verdict on COVID loan moratorium cases. Both PSU and private banks jumped after India’s Supreme Court refused to further interfere with the RBI and Federal government decision not to extend the COVID loan moratorium further beyond Aug’20, terming it as a policy decision. The SC also said complete interest waiver during moratorium time is not possible as banks also have to pay interest to depositors.

As a reminder, all Indian banks as-well-as shadow banks already credited any penal or compound interest for the 6-month loan moratorium periods (Mar-Aug’20) in 2020 (COVID lockdown issues) as per the earlier SC directive (for any loan up to Rs. 20M). And if banks have to forego original interest on such loans for 6-months, then the cumulative loss could be around Rs. 6T, which is a significant amount for the entire banking/financial sector. Thus the RBI/Federal government has instructed banks to defer EMI payments instead of complete waiver of interests.

But the SC also directed banks and the Federal government to allow compound interest waivers for all loans irrespective of their size. The Indian Federal government is bearing the cost of such compound interest waiver and estimated total grants may be around Rs. 14B.

Moreover, some stressed sectors like the power had sought for extension of the moratorium and certain relief packages. The SC turned down this request too and said it was not for courts to decide on economic and financial matters, but for the Federal government and RBI. India’s top court made its stance clear that it will not interfere in the government’s economic policy decision, which is a great relief for the market, considering the adverse SC verdict on 2G and mining issues.

The SC also vacated its interim stay on COVID loan NPA status. Thus banks now have to show higher gross NPA for around Rs. 8.7T against earlier Rs. 7.4T due to this COVID stay lifting in addition to regular elevated NPA. Overall, in Q4, banks may have to show gross NPA for around Rs. 10T. Again this higher amount was already disclosed by banks in previous quarters and thus may have been already discounted.

On Tuesday, banks, especially PSU banks were also boosted as India’s 10Y bond yield eased to +6.138% from a recent high of +6.240%.  Lower bond yield means higher bond prices and lower MTM loss and vice versa. Also, typically, banks borrow through shorter tenure bonds, while lends for longer-term at higher rates. Thus any flattening of the bond yield curve is also beneficial for their EBITDA/NIM.

On Tuesday, global cues were negative amid fresh North Korean missile tensions and the concern of COVID lockdown 3.0 across Europe coupled with safety & efficacy doubt over Oxford-Astra COVID vaccine. But Indian market sentiment was also boosted by a plunge in oil as India imports almost 85% of its requirement, although USDINR was also elevated due to broader strength in greenback amid Turkish currency turmoil. On the policy front, Modi admin reportedly plans to offer fresh incentives to companies making EVs, amid the country's efforts to reduce its oil dependence and cut pollution.

Meanwhile, India's market regulator SEBI on Monday relaxed temporarily new valuation norms that were set to affect certain longer-term bonds (AT-1) worth more than $12B after the government flagged concerns of disruption in debt markets. This is positive for MFs and PSU banks, at least temporarily as there may not be panic redemptions now. But the main issues remain: AT1 bonds will continue to be treated as 100-year bonds and there will be unwinding of positions by mutual funds in a specific time frame (in an orderly manner).

As a recapitulation, AT-1 (additional Tier-1) bonds are unsecured bonds, usually issued by banks, having perpetual tenor. AT-1 bonds have no maturity date but have a call option, which can be used by the banks to buy back these bonds from investors. These bonds are typically used by banks to bolster their core or tier-1 capital. AT1 bonds are subordinate to all other debt and only senior to common equity. MFs are among the largest investors in perpetual debt instruments, and hold over Rs.0.35T of the outstanding additional tier-I bond issuances of Rs.0.90T; i.e. almost 39%.

On Monday (22nd Mar), SBI (NS: SBI ) said the deemed residual maturity of Basel III additional tier-1 (AT-1) bonds will be 10 years until March 22. It will be increased to 20 years from April’22 to September 2022 and 30 years from the subsequent six-month period. From April’23 onward, the residual maturity of AT-1 bonds will become 100 years from the date of issuance of the bond. Further, deemed residual maturity of Basel III tier-2 bonds will be considered 10 years or contractual maturity whichever is earlier until March 2022. Post that, it will be as per the contractual maturity. Further, SEBI has asked the AMFI to issue detailed guidelines concerning the valuation of bonds issued under the Basel III framework, which should be implemented by April’21.

Overall, the SEBI has given a specific time frame to unwind the AT1 bond investment positions of MFs and its temporary relief as they don’t have to rush for redemptions and prevent losses. However, the original position of the SEBI is that perpetual bonds like AT1 bonds will be treated as 100-year bonds remain. There won’t be panic redemptions right now but banks may not be fully relieved with this temporary relief.

As a pointer, on 10th Mar, the SEBI directed MFs to value these perpetual bonds as a 100-year instrument. This essentially means MFs will have to assume that these bonds would be redeemed in 100 years. The regulator also asked MFs to limit the ownership of the bonds to 10% of the assets of a scheme as these instruments could be riskier than other debt instruments.

Notably, MFs have treated the date of the call option on AT-1 bonds as the maturity date. Now, if these bonds are treated as 100-year bonds, it raises the risk in these bonds as they become ultra-long-term instruments. Under the 10% ownership limit, MFs may have to sell these bonds, leading to bond market volatility and possible higher yields.

Now AT-1 bonds are one of the primary instruments for PSU banks to raise much-needed additional capital. If there are restrictions on investments by mutual funds in such bonds, these PSU banks will find it tough to raise capital. MFs are usually the largest investor for such AT-1 bonds amid sovereign guarantees as PSU banks are owned by the Federal government. PSU banks have cumulatively raised around $2.3B in AT-1 instruments in FY21, while private banks virtually refrained to use this instrument for raising capital.

On Tuesday, the Indian market was boosted by banks & financials, realty, infra, pharma, automobiles, techs and oil refiners (the lower price of Brent crude ), while dragged by metals (lower price as China may sell from its strategic reserve), FMCG and media. Nifty was boosted by HDFC (NS: HDFC ) bank, ICICI Bank (NS: ICBK ), RIL, Axis Bank (NS: AXBK ), Ultratech Cement (NS: ULTC ), SBI, Shree Cement and Indusind Bank, while dragged by HDFC, ITC (NS: ITC ), Kotak Bank, HUL, Powergrid, Hindalco, ONGC (NS: ONGC ) and M&M (NS: MAHM ).

As per late Tuesday cues, Nifty Future is set to open around 14750 Wednesday as Dow Future slips on the concern of higher corporate taxes in the U.S. to fund a portion of Biden’s huge infra/green stimulus for around $2.50-4.00T. The market is expecting now an easing of global/U.S. bond yields in the coming days/after 31st Mar Japanese FY ending. Japanese investors primarily sold U.S. bonds ahead of their FY ending and they may again buy back it around/after 31st Mar as a part of their portfolio rebalancing despite the upbeat stock market back home. In that scenario, we may see a new lifetime high of Wall Street-as-well-as Dalal Street in April. Biden’s infra stimulus plan may also help, while the tax hike proposal may also undercut.

Technical View: Nifty 50 Futures and Bank NIFTY Futures

Technically, whatever may be the narrative, Nifty future now has to sustain over 14650-14750 levels for any rebound; otherwise, sustaining below 14425 area, 13950 zones may be the short-term target.




INDIA 50 (NIFTY FUTURE)