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!
Thank you for posting your view on Equitymaster!
In the meantime, you may want to share this article with your friends!
The amount that you spend for your or your family's education expenses can provide you tax benefits. PersonalFN explains various Sections of the Income-Tax Act that allow such deductions and exemptions.
The finances of a large number of people get messed up due to the lack of an organised approach. PersonalFN has listed down some commandments that you must follow to enjoy a stress-free financial life.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Use of the information herein is at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Before acting on any recommendation, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: 91-22-6143 4055. Fax: 91-22-2202 8550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407