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Last Updated : Jul 06, 2017 12:24 PM IST | Source: Moneycontrol.com

PSU banks rally 2-5% as analysts upgrade PNB, Bank of Baroda after recent steep fall

Overall for PSU banks, Nomura said it expects Q1FY18 slippages to moderate from FY17 runrate, but significant reduction in slippages is expected only in the second half of FY18.

 
 
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The 2-5 percent rally in PSU banks clearly indicated that investors started taking exposure as these stocks may be available at reasonable valuations after recent sharp correction.

It seems that the recent sell-off may have priced in all negatives such as expected higher provisions due to 12 NPA accounts identified by the Reserve Bank of India under Insolvency & Bankruptcy Code, rising NPA concerns etc.

Nifty PSU Bank index fell 12 percent since May 15, 2017 but during the same period, the Nifty 50 index rose 0.8 percent and Private Bank surged 3.3 percent.

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Today Nifty PSU Bank index rose 2.8 percent intraday, especially after brokerage houses upgraded leading PSUs - Bank of Baroda and Punjab National Bank as valuations turned reasonable after recent correction on NPA concerns.

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According to analysts, these NPA issues may get resolved by next year and hence, the NPAs may start falling in the second half of FY18 onwards.

Nomura has upgraded Punjab National Bank to buy from neutral with a target price of Rs 180 (implying 32 percent upside).

After the 24 percent correction in the past two months, the research house believes incremental risk-reward is turning favourable again for the bank.

"Our adjusted book valuation of 0.55x Mar-19 book factors in Rs 79,000 crore of total stress against gross NPAs of Rs 55,400 crore (FY17) and adequately captures any asset quality risks. Near-term provisioning will remain elevated given the lower coverage of 41 percent, but the large stock of prudentially written-off NPAs provides comfort on recoveries/upgrades," it explained.

Subsidiaries now contribute 33 percent of PNB's valuation, and will continue to accrete value, it feels.

Overall for PSU banks, Nomura said it expects Q1FY18 slippages to moderate from FY17 runrate, but significant reduction in slippages is expected only in the second half of FY18.

The research house recently also upgraded Bank of Baroda to buy. It feels the bank could surprise as it is well-provided (58 percent coverage) and has internal levers to show net interest margin improvement.

ICICIdirect also upgraded Bank of Baroda to buy from hold after factoring 53 percent provisions on top 50 accounts and expected positive from resolutions.

Currently, the banking system is facing challenge primarily on two fronts – growth & asset quality. Led by slowdown in credit demand from corporate, advances book stayed flat in FY17.

However, Bank of Baroda's management has guided for credit offtake at 8-10 percent in FY18, led by retail and mid-corporate segment though credit demand from large corporate is seen staying muted, ICICIdirect said.

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First Published on Jul 6, 2017 12:24 pm
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