Improving Asset Quality, Loan Growth Hopes Spotlight PSB Lure
SBI, Bank of Baroda, PNB and Bank of India have a headstart over peers, given their large deposit base and asset mix; but concerns over NPAs and restructured assets stay
Stocks of major state-owned banks are trading at a 20-50% discount to their 10-year historic valuation and still appear attractive, given expectations of a clean-up of bad loans in their books and a rebound in growth. This discount may be justified due to high non-performing loans and concerns relating to capital adequacy. However, viewed from a 2-3-year perspective, these stocks still appear attractive as a decline in bad loans and a pick-up in loan growth are expected to improve their profitability after a couple of quarters. In the current scenario, large banks such as SBI, Bank of Baroda, PNB and Bank of India are better placed, thanks to their large deposit base and asset mix. In the quarter to March, Bank of India has shown an improvement in asset quality. Besides, overseas operations account for nearly 30% of the loan book of Bank of Baroda and Bank of India, which has supported overall business growth when domestic operations have been squeezed. Punjab National Bank has a higher proportion of domestic business and thereby, higher bad loans among its peers. However, its bad loans fell in the December quarter after rising consistently till the previous quarter. Another positive for large-sized banks has been the higher concentration in large corporates. “Midsized public sector banks have a higher exposure in the mid corporate segment where bad loans have been higher. Largesized public sector banks have a higher exposure on large corporates,” said an analyst who declined to be named. But there are some concerns investors should take note of. First, there has been a steady rise in bad loans of PSU banks, which include non-performing assets (NPAs) and restructured assets. This has resulted in higher provisions, thereby reducing overall profitability of the banks. As a result, stocks of major public sector banks have underperformed their private sector peers. In 2013, CNX PSU Bank Index, a composition of public sec- tor banks, fell 33% while the broader CNX Nifty grew 5%. For instance, SBI touched an all-time high of .` 3,515 in August 2010. However, due to a declining profit growth, the stock price has been on a downward trajectory since then. Although asset quality stress may remain for some time, a revival in the economy may lead to a decline in fresh slippages or upgradation of NPAs, thereby improving its profits in the next few quarters. Besides, loan growth has been slower due to a slump in new project investments. Over the past two years, retail segment and the working capital loans to the corporate and SME sectors have been the main contributor to loan growth. While private banks have been able to maintain their loan growth due to a focus on the retail sector, public sector banks due to their large size have seen a moderation. In coming quarters, with improvement in capital expenditure cycle, public sector banks are expected to show a pickup in loan growth. Brokering firm Quant Capital, in its recent report, had said, “Going ahead, we expect the banking industry loan growth to revive as capex cycle picks up while the improvement in economic growth helps improve the delinquency trend.” In coming years, most analysts say there would be a need for fresh capital for public sector banks. According to CRISIL, public sector banks would require nearly .` 2,50,000 crore of equity until FY19 to comply with Basel III guidelines. Given the need for continuous equity, investors are wary that the dilution may happen at low valuations. However, analysts believe these stocks may get re-rated once the economy revives. “When there is an improvement in the economy, capital can be raised without much hassle,” says Sankaran Naren, CIO, ICICI Mutual Fund. Investors should note that the recent run-up in the stocks of public sector banks may result in limited upside in the near term.
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