CAGR returns of PSBs in the past decade - Chart Of The Day 28 October 2017 - Equitymaster

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CAGR returns of PSBs in the past decade
Oct 28, 2017

On 24th October, the government announced its Rs 2.11 trillion public sector bank (PSB) capitalization plan. This move is aimed at reviving the PSBs' drowning in a bad loan mess.

The next day was a field day for investors in PSBs. Stocks went up from 30% to 49% in a day. But long- term investors might as well ignore this, since it was just one good day amongst a decade of underperformance. The top 5 stocks that went up the most on October 25th have given meager returns over the past decade.

Punjab National Bank, which went up by 49% in one day, has given annualized returns of 6.8% in the past decade even after including the 49% gain. The same goes for the other PSBs. Compare this with HDFC bank which has given a 19.3% annualized return in the last 10 years.

The underperformance can be attributed mainly to bad loans. It is no secret, PSBs have been struggling with their collections on corporate loans. As a result, they have been reluctant to even lend to healthy companies. As a result, growth of these companies has suffered.

The Indian government has recently stepped up its efforts to address the problem. As part of this, the government has amended the Banking Regulation Act through an ordinance, giving more teeth to the RBI to deal with NPAs.

The recent recapitalization plan is one more attempt to bail out PSBs and infuse liquidity into the banking system.

While this might help in the short term, it is more important to focus on the lending and corporate governance processes followed by these banks. Unless that improves, we'll have to be content with the 'one day euphoria' instead of a decade of consistent performance.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - The 13-Year Coma of Hindustan Unilever Shares...

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