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Don't rush to buy public sector bank stocks

By Puneet Wadhwa
February 05, 2018 08:47 IST
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Though most experts remain bullish on the banking space, they suggest investors buy only those banks whose NPAs are at a manageable level of 3% to 4% and there is credit growth or earnings visibility.
Puneet Wadhwa reports.

Why recapitalisation of PSU banks is challenging
Illustration: Dominic Xavier/

Analysts caution investors to not rush to buy public sector bank stocks, instead evaluate them on a case-to-case basis and invest selectively, even as the government has announced a capital infusion of Rs 881 billion for such lenders.

After this round of capital infusion, the common equity tier 1 (CET1) ratio for all PSU banks would reach over 8.5 per cent, with net stressed assets reducing to 102 per cent of net worth from 117 per cent earlier, reports indicate.


UCO Bank is expected to be the major beneficiary, as its CET1 ratio would improve to 12.5 per cent from 6.6 per cent.

The other beneficiaries include IDBI Bank, United Bank, Central Bank of India, and Bank of Maharashtra, with their CET1 ratio improving 270 to 430 basis points.

The recap programme also comes with riders, including measures to improve efficiency and encourage responsible lending that analysts said would reduce underwriting mistakes.

There is no proposal yet to merge banks, which is another positive for stronger lenders such as Bank of Baroda and State Bank of India, they said.

A key worry for markets, however, is the pricing of the recapitalisation bonds and their tenure.

'The bonds are not likely to have a statutory liquidity ratio status. We expect the coupons to be floating rate as well, else in a rising-rate environment banks will end up taking mark-to-market losses,' Nilanjan Karfa and Harshit Toshniwal of Jefferies write in a report.

Though most experts remain bullish on the banking space from a long-term perspective, they suggest investors be selective and buy only those banks whose non-performing assets are at a manageable level of 3 to 4 per cent and there is credit growth or earnings visibility.

If such banks get money, it will reflect on their fundamentals and can be bought into, they said.

"Investors should evaluate whether the money allocated will change the fortune for these banks. There are banks (like the Indian Overseas Bank) where the net outstanding is more than the net worth. In such cases, monetary support will aid to a limited extent but will not help the bank in the path of strong business growth. One should be selective," said G Chokkalingam, founder and managing director, Equinomics Research.

Since the recap announcement in October 2017, bank stocks have had a mixed run on the bourses, with only Axis Bank, ICICI Bank, and YES Bank outperforming the benchmarks -- the S&P BSE Sensex (up 9.5 per cent) and the S&P BSE Bankex (up 9.4 per cent).

Bank of Maharashtra, Central Bank of India, Andhra Bank, Union Bank of India, and Corporation Bank have been the worst-performing, down 15 to 30 per cent during this period.

'Within our coverage universe, we like BoB, SBI, and Punjab National Bank. Bank of India remains least preferred of our covered PSU banks,' Adarsh Parasrampuria of Nomura says in a co-authored report with Amit Nanavati and Riddhi Jain.

Morgan Stanley recommends owing ICICI Bank, Axis Bank and SBI. ICICI Bank, it says, offers the best risk-reward across large-cap banks in Asia.

While SBI and BoB are the top picks for Motilal Oswal Research, Chokkalingam likes ICICI Bank, Axis Bank, South Indian Bank, and Karnataka Bank.

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Puneet Wadhwa
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