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

INDUSIND BANK Share Price Down by 5%; BSE BANKEX Index Down 2.5% (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

INDUSIND BANK share price is trading down by 5% and its current market price is Rs 520. The BSE BANKEX is down by 2.5%. The top losers are INDUSIND BANK (down 5.1%) and FEDERAL BANK (down 5.9%).

BANK OF MAHARASHTRA Share Price Down by 5%; BSE BANKEX Index Down 1.5% (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

BANK OF MAHARASHTRA share price is trading down by 5% and its current market price is Rs 11. The BSE BANKEX is down by 1.5%. The top gainers in the BSE BANKEX Index [TOPCOMPANY]. The top losers is BANK OF MAHARASHTRA (down 5.1%)..

INDIAN OVERSEAS BANK Share Price Down by 5%; BSE BANKEX Index Down 1.5% (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

INDIAN OVERSEAS BANK share price is trading down by 5% and its current market price is Rs 9. The BSE BANKEX is down by 1.5%. The top gainers in the BSE BANKEX Index [TOPCOMPANY]. The top losers is INDIAN OVERSEAS BANK (down 5.1%)..

How the YES Bank Collapse Unfolded - 10 Points (Sector Info)

Mar 9, 2020

A timeline of how YES Bank went from a stock market darling to a pariah.

Today's Stock Market Crash: 10 Points (Sector Info)

Mar 6, 2020

Top factors that dragged the markets lower today.

More Views on News

Most Popular

High Dividend Stocks

Find all : Top Dividend Yield Stocks, Top High Dividend Stocks, Top Dividend Paying Stocks. High-dividend stocks can be a goo...

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Sep 24, 2020 (Close)

MARKET STATS