The rally might not be over in most of the PSU banks which have already outperformed S&P BSE Sensex so far in the year 2017. The sector which is weighed down by concerns of rising non-performing assets needs $30 billion from the government to set things right, explain analysts.
Punjab National Bank rose 66 per cent, followed by Oriental Bank of Commence, which gained 54 per cent, Canara Bank rallied 52 per cent, and SBI rose 41 per cent compared with 16 per cent rally seen in the S&P BSE Sensex so far in the financial year 2017.
Traders rushed in to cover their short positions in banking stocks after the Finance Minister at IBLA Awards last week promised a major policy decision to push for the quick settlement of the non-performing assets (NPA) at banks soon.
The intention is right but will the government be able to foot the bill which is required to repair PSU banks? PSU Banks are on inflection point and further rally will only depend on the reform process initiated by the government.
"The banking sector’s state makes one circumspect on the market and PSU banks need to see fresh equity infusion, he said. Unless this is done, the mess will not be resolved, Saurabh Mukherjea of Ambit Capital told CNBC-TV18 in an interview.
“We have been beating around the bush for three years now. Either the government, the RBI or a public-sector entity has to bear the bill to repair balance sheets of PSU banks,” he told the channel. The Bill to repair these banks will be to the tune of USD 30 billion, he added.
According to Capitaline data quoted by a media report, the total bad loans of 41 banks stood at Rs 7 lakh crore in the December quarter of FY17, up 60 per cent from the year-ago period.
In Q2 FY17, gross NPAs of the same set of banks stood at Rs 6.74 lakh crore. According to RBI’s Financial Stability Report, the gross NPA ratio climbed to 9.1 per cent in September 2016 from 5.1 per cent in September 2015.
“PSU banks should outperform in the medium term given the government weight behind cleaning the bad loan mess and the economic recovery that would add to earnings growth for the banks,” Jimeet Modi, CEO, SAMCO Securities told Moneycontrol.com.
“The private sector banks are facing some amount of competition from payment banks, technological disruptions etc. and given the alleviated valuations does not make out a good case for investment at current levels,” he said.
Where to invest in the banking sector?
Most analysts are cautiously optimistic on the banking sector and prefer names which have a strong lending franchise, focussed retail loan book, resilient asset quality, professional management etc.
Further recovery in PSU banks will be dependent on credit growth which in turn is dependent on economic recovery. Analysts put their bet on banks which are more retail focused because that is one sector which is likely to pick up pace.
Sanjiv Bhasin, Executive VP-Markets & Corporate Affairs at IIFL
The best of treasury profit may have played out for PSU banks. If you have to take a view, you have to take a view on the back that credit will expand in the second half and that should be a game changer.
“We are relatively sanguine on few names, just to name State Bank of India (SBI), Bank of Baroda (BoB), and Union Bank continue to be three top picks which we have on the PSU side,” he said.
Amar Ambani, Head of Research, IIFL Wealth & Asset Management
At IIFL, we remain averse to PSU Banks and prefer small to mid-sized private banks with the strong lending franchise, improving liability profile, resilient asset quality, robust capitalization and professional management.
The ones we like are Yes Bank, IndusInd Bank, and Kotak Mahindra Bank. We are bullish on the housing finance space also and have a positive stance on Can Fin Homes and LIC Housing Finance.
For large private corporate lenders such as Axis Bank and ICICI Bank, the credit cycle would take some time to turn for better as the pace of stressed accounts resolution has not been encouraging thus far.
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
