Nifty PSU Bank index hits fresh 9-month low

Shares of public sector banks (PSBs) came under pressure with the Nifty PSU Bank index touching a fresh ninemonth low on the National Stock Exchange (NSE).

The index reached an intra-day low of 2,956 — its lowest level since January 6, 2017 — and has slipped 20 per cent from its recent closing high of 3,723 on July 31, 2017.

By comparison, the benchmark Nifty 50 was up 1.3 per cent, while Nifty Bank (down 3 per cent) and Nifty Private Bank index (down 1 per cent) were down less than 4 per cent during the period. Among individual stocks, State Bank of India (SBI), Oriental Bank of Commerce, Union Bank of India and Corporation Bank have lost 20 per cent to 23 per cent in the last two-and-a-half months. Vijaya Bank, Dena Bank, Punjab National Bank, Punjab & Sind Bank, Bank of India, Bank of Baroda and Canara Bank were down 17 per cent to 19 per cent during the period.

The fall on Wednesday was triggered by Axis Bank, which lost nearly 9 per cent to the ~465 levels following its September quarter numbers that showed worsening asset quality. The bank’s gross non-performing assets (NPAs) and net NPAs stood at 5.9 per cent and 3.12 per cent in Q2FY18 against 5.03 per cent and 2.30 per cent in Q1FY18, respectively. In the year-ago quarter, gross NPAs were at 4.17 per cent and net NPAs were at 2.02 per cent of the loan book.

"The non-performing asset issue with PSU banks is already known. What's surprising is de-growth/subdued growth in the business itself. For some, the NPA problem is not peaking out at all. If the credit growth is not picking up, it is difficult for high debt laden PSU banks to come out of the mess they are in. That apart, select stocks had a good run recently and now investors are taking cognizance of these factors and selling," explains G Chokkalingam, founder & managing director, Equinomics Research.

Besides Axis Bank, ICICI Bank, YES Bank, Karur Vysya Bank and IDFC Bank from the private sector were down 2 per cent to 4 per cent on the NSE.

The September quarter results of Axis Bank, analysts say, have yet again highlighted the NPA problems the banking sector is plagued with. That apart, lack of credit growth remains a concern. “Even though the retail segment continues to strengthen for Axis Bank, visibility in corporate earnings is weak. The RBI's stress reporting divergence again raises a question on recognition of corporate stress, which may be a near-term overhang (for corporate focused banks),” says Kunal Shah, an analyst tracking the sector with Edelweiss, in a co-authored result review report with Prakhar Agarwal and Malav Simaria. Going ahead, analysts expect banks’ earnings to remain under pressure due to the sustained pace of high non-performing loan (NPL) accrual and the accelerated provisioning requirement.

“We expect significant increase in loan loss provisioning for wholesale-lend-ing-oriented private sector and state-owned banks, due to a sharp increase in NPLs and crystallisation of losses over FY18-20. We lower the earnings forecast for wholesale-lending- oriented private sector and state-owned banks by up to 42 per cent and 88 per cent, respectively. Return on equity (ROE) would likely remain subdued over FY18-19 for these banks,” point out analysts at IIFL Institutional Equities in a report.

Against this backdrop, Chokkalingam says investors should be cautious while investing in these scrips at the current levels. “Investors should look at price-to-book value (P/BV), which should be less than 2-3x; the net NPA percentage should not be above 4-5 per cent; and there has to be some visibility of credit growth. Look at these parameters before taking an investment call,” he advises.

Besides Axis Bank, ICICI Bank, YES Bank, Karur Vysya Bank and IDFC Bank from the private sector were down 2 per cent to 4 per cent on the NSE