Investors lost Rs 8000 crore in PNB in 2 days; should you catch the falling knife?

Public Sector Banks (PSBs) which were making a comeback thanks to Reserve Bank of India’s (RBI) recapitalisation plan and new non-performing asset (NPA) rules may have now lost the race to private banks as well as NBFCs which are now looking attractive from the investment perspective.

‘Stay away from PSU banks’ including PNB, which is the word coming from experts on D-Street. The concern of most analysts is that nobody knows if it is the beginning or the end.

Foreign branches of at least two Indian banks including Axis Bank and Allahabad Bank are likely to have been caught in the fraud with an alleged credit offering given based on letters of undertaking (LOUs) issued by PNB allegedly towards group companies of Nirav Modi and Gitanjali Gems.

“It is the end game for PSU banks caused by an out of depth central bank. The systemic fraud in these banks is part of accommodative senior brass. It looks like auditor appointment process is also corrupted,” Ajay Srivastava, CEO, Dimensions Consulting said in an interview.

“We should wait for more forensic audits of NPA accounts. PSU banks are a lifeline for MSMEs and will be negative if fraud leads to shut down of PSU bank credit to MSMEs. The govt must quarantine the problem to ensure continued credit flow to the export sector,” he said.

The Rs 11,360 crore worth of fraudulent transactions reported by PNB on Wednesday is equivalent to 8.5 times the bank’s FY17 net profit of Rs 1,325 crore. It is also close to one-third of the bank’s total market capitalisation of Rs 36,000 crore, or 2.55 percent of total loan book of Rs 4.5 lakh crore (as of December 2017).

“The bank has exposure of almost 2.77 percent of the said amount which is at Rs 11,300 crore. This is very high in terms of its exposure and as the legal proceedings will go on in due course of time we will be having the developments in the price of the stock as well,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.

“Other 6 banks which have exposure to these deals will also face some pressure in the short term. Definitely in the short term Investors should be away from PNB and few PSU banks,” he said.

What should investors do?

Investors are advised to stay away from the PSU banks. However, State Bank of India (SBI) is the only bank which most experts think could fight the storm and can be considered as a buying opportunity on dips.

Apart from select PSU banks, investors can look at NBFCs and well as private sector banks suggest experts.

“We are having a cautious view of the PSU bank. Especially after the breakout of the Nirav Modi fraud and the RBI's recent directions on the discontinuation of the asset restructuring. We are of the view that going forward, there will be more provisions by the banks towards the stressed assets and this will impact their financial,” Sumeet Bagadia Associate Director Choice Broking told Moneycontrol.

“However, once the dust of bad assets settles down, investors can once again enter into these counters. For the time being, we are recommending investors to focus on banks with high retail exposure and also NBFCs, which would try to capture the market share from the PSB banks,” he said.

Nadeem of Epic Research believes that the blue chips like SBI is the only bank we have on our radar and recent corrections post its numbers should be utilised for long-term accumulation.