Nov 24, 2011|
Is the worst over for PSU banking stocks?
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.
More Views on News
Feb 28, 2017
State Bank of India (SBI) declared its results for the third quarter of the financial year 2015-16 (3QFY17). The net interest income for the quarter grew by 8% YoY and the profit was up by 134% YoY.
Jan 31, 2017
IDFC Bank declared its results for the third quarter of the financial year 2016-17 (3QFY17). The bank posted a 25.8% YoY growth in interest income and 21% fall in profit during the quarter. Since the bank commenced its banking operations on 1st October 2015, the year-on-year performance for the 9mFY17 is not strictly comparable.
Jan 30, 2017
HDFC Bank declared the results for the third quarter of financial year ending March 2017 (3QFY17). The bank has reported 18% YoY and 15% YoY growth in net interest income and net profits respectively in 3QFY17.
Oct 25, 2016
Equitymaster analyses Initial Public Offering (IPO) of PNB Housing Finance Ltd, one of the leading Housing Finance companies, in the country.
Aug 18, 2016
Equitymaster analyses Initial Public Offering (IPO) of RBL Bank Ltd, one of the fastest growing private banks in the last six years.
More Views on News
Mar 17, 2017
The trend that makes a select group of bluechip stocks inherently safer even at peak index valuations.
Mar 22, 2017
Apurva breaks down the historic performance of initial public offerings in the context of D-Mart.
Mar 23, 2017
Many investors have got anchored to a selling price which has got nothing to do with the current state of the real estate market
Mar 22, 2017
PersonalFN provides a prudent investment strategy to invest in mutual funds as market scales a new high.
Mar 18, 2017
This is why RBI's new strategy is ineffective to deal with bad debt menace.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. 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 subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. 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.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407