PSU bank concerns overdone, buy with 1-2 year view: UBS

Stocks of public sector banks are trading at historic low valuations rendering them attractive, says Vishal Goyal, Executive Director, UBS Securities. He says the asset quality concerns around the PSU banks are overdone and one should go for them with 12-24 months view. On the hand, the correction seen in private banks is due to withdrawals by FIIs. He does not expect PSU banks to get impacted by currency depreciation in the next few quarters.

Goyal foresees more restructuring coming up in from sectors like infra and metals.
Also Read: Relax till HDFC Bank, Sun Pharma hold up: StanChart Sec Below is the edited transcript of Vishal Goyal’s interview with CNBC-TV18 Q: Is the current correction or punishment in the public sector banking space justified? Many of those stocks are down 30-40 percent YTD.
A: The stocks are down to historic lows in terms of trough valuations. Some of them are clearly looking very attractive. There are few reasons, but it is overdone to some extent. There are issues of asset quality with them, plus there is pension, liability, the calculation, which is also an overhang for them. If one has a view of 12-24 months, these stocks are definitely looking very cheap. Q: Of late, some of the private banks have also started correcting. Do you think the market feels that some of the private banks earnings momentum might also come under pressure because of the economic environment?
A: The economic environment has not changed a lot if you look at the last three months. It is more about Quantitative Easing (QE3) tapering, which is leading to this correction in private banks. It is more like Foreign Institutional Investor (FII) ownership is high and that is where the stocks are getting more punished in that sense. I think it is a flow related issue. I do not think there is a significant change in the economic outlook, especially, for private banks. Q: The more recent and rather quick development is what has happened with the currency and the way the rupee has unravelled. How much pressure do you think that is going to put on some of the public sector banks? It is sort of like a bolt from the blue which they have not been able to adequately prepare for as also is going to show up in this quarter’s performance?
A: Currency directly does not impact them. Indian banks do not have big open positions. So if you are seeing the indirect impact of currency on bond yields, the bond yields went down to 7.15 percent and again back up to 7.5 percent, still they are below 8 percent level of March, so they still would be seeing bond gains. If you think of it from asset quality point of view, nothing is going to appear in the next quarter at least, because that is more like companies that would have borrowed in foreign currency and their liability is going up. So I think it will take time to still get reported in numbers. So I do not think the current quarter or even the next two quarters are hugely impacted by this currency depreciation. Q: Some of these companies that banks have lent to are actually now looking at some kind of loan recast. They are studying various options. Which of the public sector banks do you think would be most vulnerable in that light?
A: If you look at it from overseas loan books of public sector banks, there are only two or three banks that got 20-25 percent of their loans into overseas loans and that too has been historically there for almost the last 30-40 years, so they have been doing paid finance, etc. Some of them definitely would have some external commercial borrowings (ECB) kind of exposure where the risk is highest. Loan restructuring definitely would appear for them and I do not think that again is not very well known in the sense that there is a pipeline of loan restructuring, which has been there for most of the PSU banks and that is why they are trading at 0.5-0.6 times books. So people are already building in a huge discount to their reported book value. Q: Do you see the clamour for restructuring growing? Just a couple of days back we had Orchid Chemicals saying they want to recast their loans with State Bank of India (SBI). With the passage of time this year, do you think more and more companies will approach many of the big banks for recasting their loans?
A: That trend is definitely visible. Even in the last reported quarter, the restructuring numbers were definitely much higher than the previous quarters. The pipeline for corporate debt restructuring (CDR) etc. still remains high. I think restructuring would remain high for the next three-four quarters, not only from infra, but also from metals and the new sectors, which are joining in. I do not think the restructuring is going down.