Valuation of PSU banks have increased over the last few months without any change in fundamentals.
The rally in PSU banking stocks in the last one year was largely on hopes of reforms from the central bank to reduce stress in non-performing assets (NPA). But, soon after the Reserve Bank of India (RBI) announced a measure to bring down NPA, the index slipped 3 percent since then.
The Nifty PSU index rallied over 20 percent in the last one year led by gains in Canara Bank (up 52 percent), followed by Bank of India (up 32 percent), PNB (up 32.4 percent), SBI (up 29 percent), and Union Bank of India (up 14 percent) etc. among others.
Investors pumped in money into PSU banks despite knowing the challenges the sector face, especially the PSU banks which have exposure to more than 70 percent of stressed assets.
The strong steps taken by Reserve Bank to resolve NPAs are likely to raise provisioning by a whopping 25 percent this year as lenders will take up to 60 percent haircut while resolving these accounts.
"Based on our assessment of the embedded value in the top 50 NPA cases, we estimate a 60 percent haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another 25 percent this fiscal, compared with nine percent in the last fiscal," Crisil senior director Krishnan Sitaraman said.
The RBI over a fortnight back referred the 12 largest bad loans for resolution under the Insolvency and Bankruptcy Code 2016 (IBC), which provides for these companies to be referred for liquidation.
The apex bank took the decision based on the recommendations of its internal advisory committee (IAC) that also mandated a time-bound resolution of these cases.
The largest 12 accounts the RBI named are - Bhushan Steel (Rs 44,478 crore), Lanco Infra (Rs 44,365 crore), Essar Steel (Rs 37,284 crore), Bhushan Power (Rs 37248 crore), Alok Industries (Rs 22,075 crore), Amtek Auto (Rs 14,075 crore), Monnet Ispat (Rs 12,115 crore) Electrosteel Steels (Rs 10,274 crore), Era Infra (Rs 10,065 crore) Jaypee Infratech (Rs 9,635 crore), ABG Shipyard (Rs 6,953 crore) and Jyoti Structures (Rs 5,165 crore).
“PSU Banks are facing challenging times. With the exception of a couple of them, they have stopped growing their advances book owing to a legacy of NPAs and insufficient capital adequacy. The banking sector is saddled with NPAs of over Rs 8 lakh crore, of which Rs 6 lakh crore is with PSU banks,” Dhiraj Relli, MD & CEO, HDFC Securities told Moneycontrol.
“The resolution of non-performing loans is likely to require significant haircuts if the re-priced loans are to attract attention from private investors and asset reconstruction companies,” he said.
Relli further added that the provision coverage ratio for the system will have to rise from 37-43 percent of stressed loans to 55-60 percent post the reference to the Insolvency and Bankruptcy Code unless the RBI comes out with fresh provisioning norms for such cases to give relief to lenders.
Vinod Nair, Head of Research, Geojit Financial Services said that for the near term he has a cautious view on the broad PSU banks.
“Recently, PSU Banks have moved to limelight due to the high expectation of quicker resolution in NPA issue and mergers & consolidations. PSU banks continue to grapple with muted loan growth and no significant improvement in outlook,” he said.
Nair further added that valuation of PSU banks have increased over the last few months without any change in fundamentals. “We feel that PSU banks do not offer a favorable risk reward at the current juncture,” he said.