X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Is the worst over for PSU banking stocks? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Is the worst over for PSU banking stocks?
Nov 24, 2011

Bank stocks are usually the biggest reflection of economic reality. If things on the horizon look dicey, these are the first ones to feel pressure. And so they have so far this year with the BSE-Bankex down around 28% since the start of the year, practically mirroring the 24% fall in the BSE-Sensex.

Globally, economies are weak and growth is stagnant. The Chinese dragon is breathing smoke instead of fire. The American eagle's wings have been clipped. What was just a Greek tragedy earlier has now spread like an epidemic across the continent. Domestically also the situation isn't any better. The rupee is depreciating rapidly. Oil marketing companies are also finding it increasingly difficult to reduce their losses. Companies like Kingfisher Airlines and state electricity boards are faltering. Export oriented sectors like textiles, gems and jewellery etc are also seeing slower demand.

All this bad news hasn't helped the Indian banking system much. It caused leading credit rating agency Moody's to revise the system's rating from stable to negative. It also downgraded India's mammoth public sector bank State Bank of India (SBI). But usually when bad news comes to the fore for the sector, it can turn out to be good news for investors. PSU banks are now trading at rock bottom prices and most have reached their yearly lows. Indian PSU banks are a classic case of entities that have an ability to flourish despite the government and their strict regulator, the Reserve Bank of India (RBI). Keeping this in mind, we find no reason why some of the biggest and well managed PSU banks deserve abnormally low valuations. Bank managements also are scratching their heads trying to figure this one out.

The banking sector itself and PSUs especially, have several concerns on the fore. This cannot be denied. Most important among them is the risk of rising non-performing assets (NPAs), thanks to the steep interest costs. NPAs from restructured agricultural loans and the beleaguered power sector are in fact a given over the next few quarters. Margins and loan growth too cannot be a big boost to the bottomline given the poor demand for credit. In fact, credit growth for the first six months of this year has been a disappointing 3.5%. Capital constraints and social obligations like loan subsidy and financial inclusion targets may hold back the profitability prospects of PSU banks.

But PSU banks have now finished the process of shifting from a manual recognition of NPAs to an automatic recognition through the core banking system (CBS) software. This was one of the major reasons for deterioration in asset quality seen over the past two quarters. As bank managements have admitted, the focus earlier was mainly on disbursement of loans and growing the balance sheet. Quality was a secondary issue. Now with even the smaller accounts of Rs 5 lakh and below being shifted onto the system, managements have to increase their focus on monitoring and recovery. This new system helps prevent manipulation, and leads to a more accurate picture of bank's asset quality. We expect that going forward there will be more focus on recovery efforts. However the infrastructure, export oriented and power sector loan books need to be watched carefully for signs of stress.

But all said and done, the entities that control 70% of India's banking assets cannot lose value permanently. As and when the economy shows signs of resurgence, these stocks will be the first to recover.

Equitymaster requests your view! Post a comment on "Is the worst over for PSU banking stocks?". Click here!

  

More Views on News

Bandhan Bank IPO: A Microlender Turned Profitable Bank (IPO)

Mar 12, 2018

Is the IPO of one of India's newest private sector bank, Bandhan Bank, worth applying for?

SBI: Pushed in Red on Increased Slippages and Higher Credit Costs (Quarterly Results Update - Detailed)

Feb 21, 2018

SBI posts loss on elevated bad loans and higher provisioning requirements.

IDFC Bank: One-Off Trading Loss, Expansion Pull Down Profits (Quarterly Results Update - Detailed)

Feb 8, 2018

IDFC Bank's profits hit by trading loss and higher investments to build network.

Axis Bank: Lower Slippages Save Bottomline Performance (Quarterly Results Update - Detailed)

Feb 6, 2018

Lower provisioning leads to the net profits growing by 25% during the quarter. However, asset quality remains a concern and would be the key thing to watch out for in the coming quarters results.

HDFC Bank: Loan Growth Camouflages Bad Loan Risks (Quarterly Results Update - Detailed)

Jan 22, 2018

The bank delivers a consistent performance with net profits growing by 20%. However, bad loans have risen considerably and would be the key things to watch out for going forward.

More Views on News

Most Popular

Will the IPOs in 2018 be as rewarding as the ones in 2017?

In 2017 funds raised through IPOs is highest over a decade. And the stock market still flying high, some observers are predic...

Sintex's Auditor Resigns. How You Can Protect Yourself from Such Stocks(The 5 Minute Wrapup)

Jul 20, 2018

While the attack on the bad corporate governance is an overhang in the near term...this can be a game-changer in the years to come.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

ICICI Pru Mutual Fund Tarakki Karega! - The Unethical Way?(Outside View)

Jul 11, 2018

PersonalFN explains how ICICI Prudential Mutual Fund flouted the norms of related party transactions while subscribing to the IPO of ICICI Securities.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Jul 20, 2018 (Close)

MARKET STATS