FPIs, mutual funds hike stakes in PSU banks in Q1

Foreign portfolio investors (FPIs) and domestic mutual funds (MFs) have increased their stakes in public sector banks (PSBs) in the April-June quarter (Q1FY18), on the expectation that the non-performing assets (NPAs) problem will be resolved.

The data sourced from Capitaline Plus show that FPIs and MFs have increased their holdings in State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Canara Bank, and Andhra Bank.

Of the 20 PSBs that have thus far filed their June quarter shareholding pattern, FPIs have raised their holdings in 15 banks, and trimmed their stakes in five – Allahabad Bank, Bank of India (BoI), Dena Bank, IDBI Bank, and Oriental Bank of Commerce (OBC) – by less than one percentage point. On the other hand, in the 15 banks where MFs held stakes, they have hiked stakes in 10 banks and cut in five.

FPIs and MFs’ stakes in SBI increased by two percentage points and one percentage point, respectively, after the bank successfully concluded India’s largest-ever qualified institutional placements (QIP) of ~15,000 crore. In PNB and BoB, FPIs have raised their holdings by less than one percentage point in the June quarter as compared to the March quarter.

“The resolution of stressed assets and the probability of capital infusion by the government in PSU banks have made these stocks find favour with investors. That apart, a lot of these banks have been trading at attractive valuations since long. A pickup in the economic growth cycle also bodes well. If there can be a resolution to the NPA problem, some of these stocks, such as SBI and BoB, are a good bet from a long-term perspective,” says Vinay Khattar, associate director and head of research at Edelweiss.

At the bourses, the Nifty PSU Bank index underperformed the market by falling 6 per cent in the June quarter as compared to an 8 per cent rise in the Nifty Bank Index and a 3.8 per cent gain in the benchmark Nifty 50.

However, in July so far, the PSU Bank index has outperformed with a rise of 8 per cent compared to a less than 4 per cent rise in the Nifty Bank and Nifty 50 indices. Asset quality Global credit rating agency Moody’s recently said the Reserve Bank of India’s (RBI) plan to resolve 12 large stressed accounts, which account for 25 per cent of stressed assets, will be credit positive for the banks as any meaningful resolution will improve their overall asset quality.

Fund managers agree on this. The steps taken to resolve the high debt issue with corporates will eventually benefit banks in the long run, they feel. However, one needs to be patient and invest selectively after assessing the riskreward benefits.

“One cannot be bullish on the Indian economy without the NPA issue with banks getting addressed. A lot of PSU banks have also recognised the problem and have already provided for the expected losses. Even if there is a resolution to a few high profile cases, there will be a sentimental boost that the entire pipeline will get unclogged. However, this is a long-drawn process. Investors can still make good returns from here on if the problem gets resolved,” says Ramnath Venkateswaran, fund manager (equity) at LIC Mutual Fund.

Analysts at HDFC Securities expect the performance of PSBs in Q1FY18 to be marred by subdued loan growth and elevated provisions.

“Corporate-heavy banks are expected to report subdued performance, slower growth and elevated provisions. Asset quality – movement, watchlist and resolutions – remains a key monitorable,” says a results preview note from HDFC Securities.