PSU banks rebound up to 120 per cent from their 52-week lows; should you buy?

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Updated: July 8, 2016 9:40:55 AM

Experts say low level buying, improvement in economy, peaking of asset quality and hopes of rate cut on account of good monsoon supported banking stocks in the past few months.

PSU banks stocks bounce back up to 120 per cent from their 52-week low; should you buy?Out of 24 listed PSU banks, 21 touched the new 52-low level during the last quarter of previous financial year. (Photo: Reuters)

“Buy when everyone is selling”, the adage would have been a boon for those stock market investors who bought shares of public sector banks in the previous quarter when most of them hit their 52-week low levels. Consider this: out of 24 listed PSU banks, 21 touched the new 52-low level during the last quarter of previous financial year.

However, since then they have surged up to 120 per cent till July 5. Central Bank of India and Indian Bank surged 119.61 per cent and 97.30 per cent to Rs 105.85 and Rs 149.95 on July 5 from their 52-week low levels of Rs 48.20 and Rs 76 which they hit in February this year.

Other PSU banking majors such as Allahabad Bank, State Bank of Mysore and Dena Bank gained 93.92 per cent, 91.69 per cent and 66.99 per cent, respectively, from their 52-week low levels.

The country’s largest lender State Bank of India shares rallied 50.37 per cent to Rs 223 till July 5 from Rs 148.30 on February 12, the day when it touched its 52-week low.

Bank of Baroda and Punjab National Bank gained 45.73 per cent and 64.12 per cent from their year’s low levels.

“Low level buying, improvement in economy, peaking of asset quality and hopes of rate cut on account of good monsoon supported banking stocks in the past few months. Some of PSU banks which have lower non-performing assets are looking good right now. I am bullish on State Bank of Travancore and Syndicate Bank in the present market scenario,” said G Chokkalingam, founder, Equinomics Research & Advisory.

According to Reliance Securities, asset quality stress would continue to persist along with elevated credit costs for next 3-4 quarters. Despite higher provisioning during last two quarters, provision coverage ratio (PCR) of the banking sector stood at 41.6 per cent, which suggests higher credit cost in coming quarters. Further, incremental pressure on profitability due to ageing of current non-performing assets (NPA) will be higher on public sector banks (PSBs) as their PCR stood at mere 40.5 per cent against 52.2 per cent for their private sector peers. As a result, the brokerage house expect depressed return ratio over FY17-18E for banking sector in general and PSBs in particular.

The brokerage house prefer Indian Bank in PSBs. Reliance in a research note said, “Among PSBs, we prefer banks which have higher exposure to consumer loans, as we expect pickup in retail loan demand before infrastructure/corporate loans demand rise.”

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