Public sector banks hogged limelight this week so far on account of couple of important decisions related to bad loans by the Reserve Bank of India and merger approval to State Bank of India (SBI) and its associates.
The announcements spurred a rally in PSU bank stocks. Nifty PSU Bank index has jumped nearly 5 per cent to 2,633.50 till June 15, 2016 from 2,519.35 on June 10. State Bank of Mysore, State Bank of Travancore and State Bank of Bikaner and Jaipur remained star performers of the week by surging 22.09 per cent, 20.65 per cent and 19.05 per cent, respectively, in the past three trading sessions.
Other PSU majors such as Punjab National Bank, IDBI Bank, State Bank of India and Bank of Baroda also gained 6.89 per cent, 6.88 per cent, 4.90 per cent and 3.76 per cent, respectively, this week. Barring Indian Overseas Bank (down 1.88 per cent), all other public sectors banks climbed between 1.40 per cent and 3.20 per cent.
Market experts sees some buying opportunity in the public sector banks. Mustafa Nadeem, CEO, Epic Research said, “PSU banks have mostly priced in all negative news and till FY16 it was meant to as RBI proposed provision for all assets. The recent relaxation will help them monitor sustainable debt from the unsustainable part. The implications will have effect in long term and may see turnaround in the second half of FY17. We believe one should look at PSU banks as a buying opportunity for coming FY17.”
In a significant move, RBI came out with a scheme wherein a portion of bad loans on large projects could be converted into equity or other instruments under supervision of Indian Banks’ Association (IBA) overseeing committee. According to market experts, the Scheme for Sustainable Structuring of Stressed Assets (S4A) will cover those projects which have started commercial operations and have outstanding loan of over Rs 500 crores. This largely came into effect after the central bank determined that any effort to clean up the banking system of disguised defaulters will be forced to recognise the need to bail out large units in a resource-poor and underemployed country.
Hatim Broachwala, research analyst, Nirmal Bang Institutional Equities said, “The latest RBI announcement on ‘Scheme for Sustainable Structuring of Stressed Assets’ will add another weapon to the banks armour. In our view the real revival in PSU banks will only happen post pickup in the economy. In the PSU space, we have ‘Buy’ rating on SBI.”
On June 15, SBI’s associate banks hit upper circuit after the Union Cabinet cleared merger of the country’s largest public sector lender with its associates. SBI has five associate lenders — State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad.
According to Nirmal Bang Institutional Equities, For SBI, being the parent, there will be additional pension-related costs amounting to Rs 3,000 crore, but from a long-term perspective the merger will lead to synergy, increased balance sheet strength and also cost optimisation via rationalisation of branches.
The asset quality of PSU banks has seen sharp deterioration in the last couple of quarters. Post RBI’s call for asset quality review (AQR), banks have recognised large and troubled assets as non-performing assets (NPAs) and have taken provisions on the same.
Siddharth Purohit, senior equity research analyst, Angel Broking said, “The recent move by RBI has relaxed the norm where in banks can classify the loans as sustainable and unsustainable. Under the new guidelines banks will not have to recognise serviceable debts as NPAs and hence don’t have to take the burden of provisions. This is certainly a good move for banks with high exposures to corporate. SBI and Punjab National Bank (PNB) among the PSU who have large corporate exposure should benefit from this move. However, the asset quality problem for PSU banks doesn’t seem to be getting over any time soon. ”
Nadeem is bullish on State Bank of India, Canara Bank and Bank of Baroda with a target price of Rs 270, Rs 290 and Rs 210, respectively.
Nikhil Kamath, co-founder and director, Zerodha is bullish on PNB, SBI and Canara bank at the current juncture. “These stocks look fairly valued at this point and could return significant beta over the long term,” he added.