5 PSBs on the Move: Government to Reduce Stake?

In a surprising turn of events, private banks, which have always been the favourites of institutional investors, lost the spot to public sector banks, who are touching the sky riding on retail bulls.

So far in 2024, all public sector banks have given double-digit returns to investors. On the contrary, private sector banks have seen single to double-digit fall in share prices.

The government is keen to take advantage of the sharp rally in share prices of public sector banks (PSBs) that are riding on much-improved financial performance and fundamentals by privatising them.

Public sector banks (PSBs) in India are planning to reduce the government's stake in these banks to below 75% to comply with regulations set by the market regulator.

According to the guidelines, all listed companies are required to maintain a minimum public shareholding (MPS) of 25%. While state-owned banks were granted an extension, they must meet this MPS requirement by August 2024.

The stake sale can be conducted through the offer-for-sale route for lenders that are not inclined toward a rights issue.

Here are 5 PSU banks to reduce government shareholding.

#1 Punjab & Sind Bank

First on the list is Punjab & Sind Bank.

It's a mid-sized corporate-focused public sector bank based out of New Delhi that operates through a network of 1,553 branches with a branch concentration in north India.

Presently, the Indian government commands a majority stake of 98.25% in the institution, leaving a mere fraction, less than 2%, for public investors. As per the regulations, the institution is poised to divest approximately 23.3% of its ownership.

Further, on 28 February 2024, the board of Punjab & Sind Bank approved capital raising of up to Rs 20 billion (bn) to fund business growth.

The capital mop-up will be done in one or more tranches within 12 months.

Going forward, the bank aims for 2,000 branches and as many ATMs in the country in the next three years as part of its strategy to increase touch points and brand visibility.

The bank intends to open 50 branches during the current financial year, taking the branch count to over 1,600.

The addition of branches would help mobilise low-cost deposits and also increase the penetration of loan products.

For more details, see the Punjab & Sind Bank company fact sheet and quarterly results.

#2 Indian Overseas Bank

Second on the list is the Indian Overseas Bank.

Indian Overseas Bank (IOB) is one of the oldest and major Public Sector banks in India.

It is an Indian public sector bank. It has about 3,220 domestic branches, 2 DBUs (Digital Banking Units), about four foreign branches and a representative office.

Presently, the government maintains a majority stake of 96.4% in IOB. In line with the market regulator regulations requiring the bank to limit government ownership to below 75%, the institution has to reduce the government's stake by around 21.4%.

Apart from that, recently, Indian Overseas Bank (IOB) has decided to sell loans in the SME segment comprising 41 accounts worth Rs 2.1 bn.

The bank is looking to recover 60% of the debt. It has invited potential buyers to submit offers, with 20% in cash and 80% in security receipts (SR), driving the stock higher.

Looking into the future, Indian Overseas Bank (IOB) envisions a continual reduction in net Non-Performing Assets (NPA), demonstrating a firm commitment to managing slippages and upholding stringent control over asset quality.

The bank is optimistic about the forthcoming financial year, projecting a credit growth of 13-14%.

Additionally, after a break of about eight years, the Indian Overseas Bank (IOB) is working to scale up its footprint by adding about 40-50 branches.

For more details, see the Indian Overseas Bank company fact sheet and quarterly results.

#3 UCO Bank

Third on the list is UCO Bank.

UCO Bank is a commercial bank and a government of India undertaking.

It offers a host of value-added banking solutions to its customers, including international banking services, services for NRIs loan schemes, deposit schemes, and value-added e-banking solutions.

They also possess a host of branches authorised for direct tax collection in India. The bank has 34 regional offices and 230 branches in India.

At present, the Indian government holds a 95.4% stake in the bank. Consequently, the bank aims to reduce this ownership by 20.45%, aligning with directives from market regulators.

Recently, the Central Bureau of Investigation (CBI) has conducted raids at 67 locations in seven cities of Rajasthan and Maharashtra in connection with the Rs 8.2 bn IMPS scam in UCO Bank.

Going forward, the company plans to launch a new product for rooftop solar. This could just as well work as UCO Bank's differentiator.

The bank is currently projecting a higher loan amount disbursement for infrastructure and corporate loans compared to the last quarter.

For more details, see the UCO Bank company fact sheet and quarterly results.

#4 Central Bank of India

Fourth on the list is the Central Bank of India.

The company offers various banking services, including digital banking, deposits, retail loans and agriculture.

Its deposit offerings comprise savings accounts, current accounts, time deposits, and interest-rate products. Recent data indicates that the government holds a majority stake of 93.1% in the bank.

By August 2024, the bank aims to monetise approximately 18% of this government ownership, as per regulatory requirements.

Central Bank of India has approached the government with a proposal for an offer for sale (OFS) instead of a fresh issue of equity through routes like qualified institutional placement (QIP) or a rights issue.

It has chosen to take the OFS route to avoid dilution of its equity capital base while increasing the public float of shares.

As part of the restructuring, it has restructured accounts from Manipur state due to disruptions, increasing the standard restructured book.

The Central Bank of India is taking various initiatives towards its digital segment. Its Cent Neo project aims to improve digital products for retail and wholesale banking.

For more details, see the Central Bank company fact sheet and quarterly results.

#5 Bank of Maharashtra

Last on the list is Bank of Maharashtra.

The public sector bank is engaged in retail banking, corporate/wholesale banking, priority sector banking, treasury operations and other banking services.

The bank is headquartered in Pune and operates through a network of 2,341 branches across India.

As of the December 2023 quarter, the government holds an 86.5% stake in the bank. Consequently, the bank might seek a dilution of approximately 11% to comply with the Minimum Public Shareholding (MPS) requirement.

The bank recently raised Rs 10 bn via the QIP route.

Going forward, the Bank of Maharashtra is looking to grow its business in Gujarat by 25% by the end of the second quarter of the financial year 2024-25.

For the full year, the bank aims for 18-20% growth in advances.

It's also targeting a business of Rs 5 trillion and becoming a fully digitised bank by the end of the financial year 2024.

For more details, see the Bank Of Maharashtra company fact sheet and quarterly results.

Conclusion

Depending on market conditions, each of these banks will take a call in the best interest of shareholders.

Going forward, the ongoing asset quality improvement, enabling further moderation in credit costs will help PSBs sustain a higher ABV growth rate compared to private banks.

The market capitalisation of PSBs has witnessed robust growth in recent years, supported by capital raising initiatives and government recapitalisation efforts, strengthening their capital adequacy ratios and facilitating healthy loan growth while enhancing their balance sheets.

With asset quality stress largely behind, the market expects asset quality ratios to improve further, with the NPA ratio becoming broadly comparable to private banks by FY24 end.

This will keep credit costs under control and support overall profitability.

Despite systemic pressures, PSBs maintain a controlled credit-to-deposit (CD) ratio, indicating ample liquidity, whereas private banks are facing challenges due to historically high CD ratios.

Remember, a fundamentally strong company has the potential to give good returns in the long run. Hence, it is better to carry out proper due diligence before investing in any stocks.

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