Will Public Sector Banks Rule Once Again? Here's a List of Top 4 PSU Banks to Watch Out for...

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  • Mar 3, 2022 - Will Public Sector Banks Rule Once Again? Here's a List of Top 4 PSU Banks to Watch Out for...

Will Public Sector Banks Rule Once Again? Here's a List of Top 4 PSU Banks to Watch Out for...

Mar 3, 2022

Will Public Sector Banks Rule Once Again? Heres a List of Top 4 PSU Banks to Watch Out for

For many years, public sector banks (PSBs) have been trying to tell us that the worst is behind us.

The only problem is that the data does not bear this out. There were times when out of the total listed PSBs, only a couple of them made profits.

But now, there's a ray of hope.

Out of the 13 listed PSBs, 11 of them have posted a net profit in fiscal 2021. The two exceptions are Punjab & Sind Bank and Central Bank of India.

The Union Budget 2022 has laid out a massive capex plan which will need huge infra funding.

If capex has to pick up, funding is required. The shift has already started to happen from retail focused banks to corporate banks. All PSU banks are big funders of capital expenditure, making them the biggest beneficiaries.

But PSU banks are notorious.

In fact, given the NPA crisis in the Indian banking sector, quite a few public-sector banks would have gone under water if not for government's intervention.

That is why it's crucial you keep track of your bank's financials. Choose only those banks whose bad loans are within reasonable limits.

Let's take a look at the top 4 PSU banks which you should watch out for as the massive infra funding takes place...

#1 State Bank of India (SBI)

No prizes in guessing the first bank on our list. You probably thought of State Bank of India (SBI) when you opened this article.

SBI, which has been actively funding capex for infrastructure, is set to be one of the biggest beneficiaries as the capex boom plays out.

For instance, the Adani group last year readied plans for a Rs 150-bn funding from SBI for its Navi Mumbai airport. This is one of the largest project financing loans, signaling the return of capex loans for infrastructure projects.

Reports state that SBI has completed the project appraisal and is now finalising contours of the loan, which is likely to be for 15 years.

SBI might be the largest lender in India but not the most efficient one. For very long, the bank has struggled with the bad debt problem.

SBI has had a history of reporting higher provision every passing year. Higher provisions eat up a major chunk of its revenue leaving no or little money for investors.

But now, SBI appears to be scripting a turnaround.

The incorporation of a national asset reconstruction company (NARCL) has given the bank a big boost. NARCL is a government entity that will buy the bad loans from the Indian banks thereby helping them clean their books.

The interest cycle in India is at its lowest, flooding the Indian economy with cheap credit. This cheap credit will help drive India's economic growth. Therefore, Indian banks will report strong credit growth in the near future.

Given its ability to leverage leadership position, SBI is seen as the largest beneficiary of India's economic growth.

To know more, check out SBI's financial factsheet and quarterly results.

#2 Bank of Baroda (BoB)

Over the years, Bank of Baroda has tied up with banks and financial entities for financing infrastructure projects.

It's loan growth is expected to pick up as it allocates fresh loans for government's capital expenditure plan. The state-owned lender already has a pipeline of unutilised credit limit for working capital and term loans.

In an interview with The Economic Times last month, the company's MD & CEO was quoted as saying:

  • In this Budget, we have an all-time high spending on infrastructure. This should get translated into demand growth for loans as we go ahead apart from the secular improvement in the economic cycle which we expect now.

For the most recent quarter, BoB reported a 107% rise in its net profit on the back of higher net interest income and lower provisions. While announcing results, the bank's management said that it is on track to achieve a loan growth of 7-10% in the current financial year.

For fiscal 2021, Bank of Baroda posted improvement across parameters.

Bank of Baroda - Financial Snapshot and Key Ratios

Rs m, Consolidated Mar-17 Mar-18 Mar-19 Mar-20 Mar-21
Interest Earned 444,735 460,564 529,062 788,947 743,140
Operating Profit 30,243 (21,057) 15,246 (12,339) 63,732
PAT 17,774 (19,121) 10,871 9,422 14,539
Total Assets 7,192,205 7,478,049 8,196,719 11,999,421 12,026,758
ROCE (%) 6.62 0.2 4.64 2.67 6.68
RONW (%) 4.57 -4.62 2.45 1.63 1.98
Data Source: Ace Equity

Bank of Baroda is expected to see some inflows as reports state RBL Bank is likely to be excluded from the Nifty Bank index and will be replaced by the state owned lender.

To know more, check out Bank of Baroda's latest quarterly results.

#3 Punjab National Bank (PNB)

Next on our list we have Punjab National Bank (PNB).

PNB, being the second largest PSB in India, is also set to see higher loan growth in the coming quarters now that the Budget 2022 has set stage for additional funding for capex.

The lender reported profit after tax of Rs 11.3 bn for the December 2021 quarter.

Shares of PNB have come under pressure in recent days as it has an exposure to ABG Shipyard and because it was placed in the F&O ban list.

chart

In March 2020, the Union Cabinet approved the amalgamation of PNB, United Bank of India, and Oriental Bank of Commerce. The government owns 73.15% of the bank's outstanding shares as on December 2021.

PNB had a domestic branch network of 10,528 branches, two international branches and 13,506 automated teller machines as of September 2021.

While the negatives for PNB outweigh the positives, it must be noted that PNB has increased market share of retail, agriculture and MSME advances in recent quarters.

To know more, check out PNB's financial factsheet and its latest quarterly results.

#4 Canara Bank

Last on our list we have Bengaluru-based Canara Bank.

Currently, Canara Bank is the third-largest PSB. The government owns majority stake of 62.93% in the bank followed by LIC at 8.83%.

The situation seems to be turning around big time for Canara Bank with both net profit and asset quality showing huge improvement.

The state-run lender in January this year reported a net profit of Rs 15 bn. This is more than double from a net profit of Rs 7 bn reported for the corresponding period a year ago.

Canara Bank's asset quality was the best in 24 quarters. Its gross NPAs came down to 7.8% in December 2021 from 8.42% in the previous quarter.

For fiscal 2021, Canara Bank turned around and reported a profit of Rs 25.6 bn as against loss of Rs 58.4 bn reported a year ago. The improvement was supported by both increase in net interest income and non-interest income.

Post declaring its December quarter results, the company's director Debashish Mukherjee said that Canara Bank will wait for the right opportunity to fund infra projects.

  • Canara Bank, now being the third largest bank among the PSBs, we will definitely join hands in infrastructure funding. So we are there for infrastructure funding if the situation comes and if proper opportunities come in front.

Ever since the Budget proposals for fiscal year 2022-23 were announced, Canara Bank shares started to gain traction and saw a spike.

chart

As banks fund infrastructure projects, they will see healthy credit growth and higher revenues which in turn will result in improved margins.

Will public sector banks find favor in 2022?

Public sector bank stocks are often considered to be value destroyers in the long run.

Don't be surprised if you come across government-owned banks which go on to underperform for years or decades, even in a bull market.

Even as they have decent and sound fundamentals with dirt cheap valuations, investors give them the last preference as they think there are better opportunities elsewhere.

But why?

One reason can be poor quality lending.

The biggest problem for PSU banks is not allocating 'other people's money' judiciously. Banks lend other people's money. Bad lending leads to NPAs which then needs to be provided for and erode the bank's net worth.

Elevated Gross NPA Ratios

chart

PSU stocks are extremely vulnerable to poor quality lending and high NPAs especially when interest rates move higher.

But now, the stage is set for PSBs. After a decade of underperformance, they are turning tables.

A proxy play to participate in the capex boom is corporate facing banks. These are banks who have a higher share in corporate lending and are not focused on retail customers.

While the capex funding will benefit state run banks, big players like SBI, PNB, Canara Bank and Bank of Baroda will be better equipped to get back on the growth track over the coming years.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Equitymaster requests your view! Post a comment on "Will Public Sector Banks Rule Once Again? Here's a List of Top 4 PSU Banks to Watch Out for...". Click here!

1 Responses to "Will Public Sector Banks Rule Once Again? Here's a List of Top 4 PSU Banks to Watch Out for..."

Anish George

Mar 3, 2022

I think this might take time but our PSU banks will surely rule once again. Great Article ! Thanks for sharing.
Would love to read more from you !

Anish George

Like (1)
  
Equitymaster requests your view! Post a comment on "Will Public Sector Banks Rule Once Again? Here's a List of Top 4 PSU Banks to Watch Out for...". Click here!

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