Time to turn bullish on PSU banks after Cabinet clears Rs 30,600 crore-guarantee for bad bank?

"We are also setting up an India Debt Resolution Company Ltd to manage the Non-Performing Assets (NPAs). In this company, public sector banks (PSBs) and state-owned financial institutions will own 49 percent stake," Finance Minister Nirmala Sitharaman said. Private sector banks will also hold a stake in the so-called bad bank.

Also read: Cabinet approves moratorium of four years for telcos to pay AGR dues

The market cheered the decision as the Nifty PSU Bank index rallied 8.4 percent in two straight sessions on September 15 and 16.  Banks also heaved a sigh of relief after the government on September 15 offered the telecom industry a four-year moratorium on payment of adjusted gross revenue (AGR) and spectrum dues starting October 1. Several PSU banks have large exposures to telecom service providers.

The Nifty PSU Bank index, however, saw a correction on September 17 closing 3 percent down on profit booking and selling pressure. The index a big bearish candle after two days of robust bullish candles.

Sharma said they are highly bullish on PSU banks and them to outperform even some of the private-sector lenders.

Also read: IBA moves RBI seeking licence to set up Rs 6,000-crore NARCL; approval likely in next few weeks

"The Cabinet approval for security receipts is a welcome move for PSU banks as the NPA problem was a major issue for these banks and was hampering the performance of this segment at large," said Gaurav Garg, Head of Research at CapitalVia Global Research.

"With this move, the balance sheets of these banks may lose their excess baggage of non-performing assets (NPAs) with 15 percent cash payment from NARCL and remaining as security receipts guaranteed by the government of India, therefore the overview of this segment looks good and investors may make positions in this space."

NARCL cannot solve the bad-loan problem as the solution would be banks giving out good credit, which is possible by better governance and improved management, he added.

Santosh Meena, Head of Research at Swastika Investmart, too, said the bad bank is a positive trigger for PSU banks and the overall economy. This event could be a long-term positive trigger for PSU banks and the infrastructure sector, Meena said.

What to pick?

The country's largest lender State Bank of India is largely the top pick in the PSU banking space. "SBI will remain our top pick in the banking sector and it may outperform most of the private banks in coming years," said Meena.

Sharma of Equity99 likes State Bank of India as well as Canara Bank.

Garg said investor should look at PSU banks right now as the valuations of public sector banks are quite attractive as compared to private banks.

"The P/E multiples of most PSU banks are in the range of 10-17 times, whereas most of the private banks are having P/E of more than 20 times. With a good solution to the NPA problem investors can now prefer PSU banks," he said.

Garg advising buying State Bank of India with a target of Rs 512 and Bank of Baroda with a target of Rs 105.

"The State Bank of India is one of the largest public sector banks in the country, the stock looks fairly valued with P/E of 16.6 and P/B of around 1.5. The stock has been showing consistent growth in the net profit and EPS also therefore we advise long position in the stock with Target of Rs 512," he said.

In case of Bank Of Baroda, he said the lender seems to be another fairly valued stock in the space with P/E of 13 times and P/B value of 0.5 which looks quite attractive. "The stock is forming a cup and handle pattern on its monthly charts and therefore we advise long position in the stock with target of Rs 105."

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