An idea for the brave hearts: buy PSU banks

Himadri Buch & Shishir AsthanaMoneycontrol

Public sector banks have been at the receiving end of investors’ wrath since 2010. Markets have touched new highs but these banks have been stranded on the wayside, and rightly so. With the kind of asset quality these banks are burdened with, only government’s backing has helped them survive the rot.

However, savvy investors have now started selectively looking at the stocks. Sanjiv Bhasin, Executive VP, Market & Corporate Affairs, IIFL in an interview with Moneycontrol said: "Banking is in a very sweet spot after being awash with liquidity and the government is very proactively looking at the asset quality crisis."

Most analysts are, however, maintaining a cautious view on public sector banks, but that has always been the trend. Analysts normally change their views based on price movement. Share price, on the other hand, discounts news well ahead of time.

Despite the overly bearish news on public sector banking stocks SBI is within 10 percent of its all-time high levels.

The NDA government has spent much of their three years in power in trying to get public sector banks on their feet. Various permutations and combinations have been tried to get public banks in a normal working condition, but the impact of a slowing economy, crony capitalism and policy paralysis of nearly a decade of UPA government was so deep that banks are still struggling with the assets.

The government then decided to merge some of the smaller banks with the bigger ones. If left by themselves, these banks could have only struggled to remain afloat and had not grown and contributed to the economy.

Various schemes launched by the government have met with limited success and in many cases delayed a resolution. Viral Acharya, a specialist in bank restructuring, was parachuted down from the US and made the deputy governor of RBI to manage the situation.

The government is now contemplating a new policy to help clean up its toxic assets by empowering the Oversight Committee (OC) which will have special powers to resolve NPAs. The committee will now be given powers to resolve bad loans while banks will be allowed to take a haircut on their loans within permissible limits.

There are also talks of a bad bank and speedy implementation of Bankruptcy Law which will help clear the mess in public sector banks. Bhasin feels that sooner rather than later there will be a resolution to the asset quality issue among public sector banks. And, if that happens, it would be difficult to stop the rally in these banks.

Meanwhile, Bhasin points out that PSU banks have learnt the tricks of the trade from their private sector peers and have been focusing on retail segment where the loan size is smaller but yields are higher and the impact on the balance sheet from individual defaults is negligible.

Meanwhile, public sector banks are slowly catching up with the private sector ones. The difference between NSE PSU Bank Index and NSE Private Bank Index is near the lowest point in the last 18 months.