UPDATE ON BANK OF INDIA and UCO BANK

With reference our SHORT SELL call on above 2 stocks, BOI had made low
of Rs 78.35 and even UCO bank had fallen to Rs 30.05. Subsequently,
both stocks have staged smart rise. However, we wish to inform you as
under:

1. Markets have bounced sharply in 2 days. Hence, even bad stocks tend
to rise in tandem with broader indices.

2. In rising market, panic short covering by faint hearted. Indian
markets have risen in tandem with global markets (no improvement in
fundamentals)

3. Media Hype: Govt machinery and various channels have gone in
overdrive to repeatedly emphasize that huge banking reforms in
pipeline and there will be infusion of funds in PSU Banks by Govt.
Firstly, we wonder what reforms Govt is planning to increase
efficiency of PSU Bank staff, how much autonomy Govt will grant to
CMDs for taking independent decisions and not succumb to political
pressures. Can Govt reduce/break stronghold of trade unions over PSU
Banks? Nothing will improve unless politician-businessman nexut is
broken which is primary reason for The Great Bank Robbery. Intended
reforms are more of political statements to pacify the markets.

Coming to infusion of Funds: Govt pumped nearly 60,000 crores in
various PSBs in last 2 years at much higher price. What has been the
result? Govt has been subsiding inefficient banks with tax payers'
money.

Govt has put enormous amount of money in AIR INDIA But unable to stem
the rot. Market share of Air India has plummetted from 67% to 27% with
continuously mounting losses. Hence, infusion of few thousand crores
in so many PSBs will be like putting balm on a deep bleeding wound.
And, moreover, can Govt afford resonably large infusion funds,
considering that Govt is alread strapped for funds.  Hence, investors
are advised not to take media statement at face value and do realistic
analysis of extent of crisis and intended small action.

FINALLY COMING TO FUNDAMENTALS: We will not be surprised if few PSBs
(like UCO Bank) become AIR INDIA/MTNL (perrenially ill) of Indian
Banking Industry. Such fears are based upon solid facts. We repeat
that so far, only Dust off the kitchen platform is coming off.
Cockroaches hidden under the platform are yet to come out. In Q4, BOI,
UCO Bank etc  are bound to report MUCH HIGHER LOSSES, MUCH HIGHER
NPAs, MORE SLIPPAGES. Their operating profits are plunging (even if we
forget NPAs) as COST TO REVENUE in some of PSBs is as high as 56% as
against industry norm of 25-30%.Due to bad loans, credit growth is
slowing down, rather there is degrowth in many cases. It may sound
unbelievable but YIELD ON ADVANCES at 9.48% in UCO Bank IS BELOW EVEN
THE BASE RATE. NPAs are rising but recovery of NPAs is just 5% of
total NPAs.

Hence, we feel that fundamentals of banks like BOI and UCO Bank at
least (where we have done extensive research, where we have reliable
sources) WILL NOT improve in 2016 at least. Rather Q4 may bring new
shocks

Hence, we can only advise (those who have SHORTED on our
recommendation) not to panic,muster courage, hold your position and
even roll over your positions to March because firstly, post budget
sharp correction is expected in broader indices which will help to
pull down prices of both stocks and even otherwise, stock prices are
bound to get tired. You have seen how Maruti had jumped after our
SHORT SELL advice but in 1 week, Maruti fell more than we had
estimated.
Fall in UCO and BOI will be much steeper than recent rise.

We maintain our SELL on both stocks