PSB STOCKS DOWN 16-60% IN 6 MONTHS

In a matter of six months, investors, including the government of India, have lost a whopping ~1.29 trillion, measured by the value of their holdings. The combined market cap of 21 public sector banks (PSBs) has fallen from ~5.48 trillion on 17 November last year to ~4.19 trillion currently, thanks to worries over increase in non-performing assets and the negative sentiment post Nirav Modi fraud at Punjab National Bank. To some extent, the surge in bond yields on government securities (G-secs), which have impacted the treasury profit of banks, has also played a role.

In a matter of just six months, investors, including the government, have lost ~1.29 trillion, measured by the value of their holdings. The combined market capitalisation of 21 public sector banks (PSBs) has fallen from ~5.48 trillion on November 17 last year to ~4.19 trillion currently, mainly due to worries over increase in nonperforming assets (NPAs) and the negative sentiment post Nirav Modi fraud at Punjab National Bank (PNB). To some extent, the surge in bond yields on government securities (Gsecs), which have impacted the treasury profit of banks, has also played a role.

Since November and now, 20 of the 21 public sector bank stocks are down between 16 per cent and 60 per cent. State Bank of India, the country’s largest lender, has lost 28 per cent in market value, while PNB, the second-largest PSU bank, is down the most at 60.4 per cent. Consequently, the Nifty PSU Bank index is down 33 per cent.

In comparison, the Sensex and Nifty are up 6.1 per cent and 4.4 per cent, respectively, in the last six months. This loss in combined market value of the 21 public sector banks is almost 1.5 times the ~880 billion capital infused by the government in 2017-18, or 61 per cent of the planned capital infusion of ~2.11 trillion under the new Indradhanush programme for public sector banks.

The RBI, in a circular on February 12, 2018, came out with new rules to recognise and provide for bad loans or NPAs. As a result, analysts said, banks would have to increase provisions for bad loans in the March and June 2018 quarters, besides witnessing a spike in their NPA ratios. The initial results of public sector banks for the March quarter are already reflecting those fears.

On the early morning of February 14, PNB also revealed to investors the ~115-billion fraud at one of its Mumbai branches by Nirav Modi and his firms. This, in addition to the RBI's new NPA norms, led to PNB reporting a net loss of ~134 billion in the March 2018 quarter (announced on Tuesday), highest in the banking history besides impacting investors' trust. The PNB stock fell over 12 per cent on Wednesday. Between November 17 last year when the Nifty PSU bank index peaked (closing value basis) and February 12, this index was in a consolidating mode having corrected marginally. However, since then the index has taken a beating.

Recently (on May 11), the RBI restricted Dena Bank from lending any fresh credit and recruiting staff, as a part of the former's prompt corrective action (PCA) measure. A bank is put under PCA programme if it fails to meet the regulator’s asset quality and other norms.

Interestingly, IDBI Bank, which was put under the PCA programme last fiscal, is the only public sector bank stock to have ended in the black, up 4.1 per cent in the last six months.

Public sector bank stocks had rallied sharply after the government announced infusion of capital worth ~2.11 trillion through its revamped Indradhanush programme, or Indradhanush 2.0, in mid-November 2017. In the original plan announced in August 2015, the Centre had announced an infusion of ~250 billion each in 201516 and 2016-17, and ~100 billion each in the following fiscals.

Under Indradhanush 2.0, capital infusion is aimed at supplementing the achievement of regulatory capital norms by public sector banks through their own efforts and, based on performance, augmenting their growth capital. The Centre announced that a differentiated approach would be followed, based on the strength of each bank, a January 5 statement by the finance ministry said.

"Corporate sector is not seeing capital expenditure programme and to raise the business from retail, public sector banks need to have systems in place to compete with private sector banks that have gained good amount of market share. The market will take some time to believe that all the problems of public sector banks are behind us,” according to R Sreesankar, co-head equity at Prabhudas Lilladher.