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

The Economic Times - - Markets & Finance - SU­RAJ SOWKAR

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.

MSCI Emerg­ing Mar­ket in­dex

S&P CNX Nifty

Nifty

MSCI EM

-2.93

11.61

0.99

2.43

-2.05

-8.43

3.09

5.54

6.28

-2.32

1.07

16.03

7.08

14.13

15.04

9.54

4.88

9.66

14.60

16.54

9.82

13.16

-5.83

16.75

8.59

8.31

-1.73

-0.81

-3.64

-9.63

4.45

1.55

-1.52

-1.27

6.18

12.31

14.19

8.39

4.56

8.71

13.99

14.22

8.83

11.62

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