Amid rally, look to hop off PSBs
Analysts cautious, given structural problems facing public sector banks
As banks opened their doors to the public on Thursday, their stock prices headed north, because banks are seen as benefiting from withdrawal of banknotes. For one, as people deposit banned notes of ~500 and ~1,000 into their bank accounts, current account and savings account deposits of banks will go up — these deposits are essentially lowcost funds or low-cost borrowings for banks. Apart from rubbing off favourably on banks' net interest margins, these will provide room for cutting bank lending rates, which will corner additional market share from peers. Third, higher number of transactions via net banking, apps, credit and debit cards, and other channels will aid fee income for banks. The fourth very important but unconfirmed benefit could be that government may deploy part of these inflows to ensure capital adequacy for select public sector banks (PSBs). Last, this whole process could bring in cash-dependent segments under the banking fold. This could boost loan growth and financial inclusion.
Most bank stocks, thus, rallied on Thursday, with PSBs leading from the front. As against gains of one to six per cent for private banks, PSBs surged between 8 and 13 per cent on Thursday. But is this rally sustainable and is the Street turning positive on PSBs? The answer to both is in the negative, say analysts.
The reason for the bigger surge in PSBs is market's anticipation of capital infusion by the government. However, there is no official word from government on this and, hence, this seems speculative. Also, even if there were to be capital infusion, PSBs (except State Bank of India or SBI) are dealing with larger, structural issues of falling profit, deteriorating loans, weak capital adequacy, and market share loss to private counterparts. These are unlikely to be resolved in a hurry. In fact, the loan quality issue continues to be huge for private players Axis Bank and ICICI Bank as well. But these continue to generate healthy operating profits and, hence, can handle loan stress better.
Against this backdrop, analysts continue to be cautious on PSBs. Suresh Ganapathy, analyst at Macquarie Capital, says, "India as a market has always found loopholes to circumvent any issues and, hence, unless we get a clear idea on the eventual benefit of banknote pullback and the future plans of government, we wouldn't recommend investors to buy PSBs."
"We have an under-perform rating on all PSBs and will recommend investors to use this rally as a good opportunity to exit these PSBs," Ganapathy adds. Other analysts echo similar views. Siddharth Purohit of Angel Broking says, "We believe large private sector banks, with balanced loan book between corporate and retail (individual consumer) segments, will benefit more from incremental deposits from banknote pullback as compared to PSBs. After Thursday's rally, investors can book profits in weaker PSB stocks; we like SBI and Punjab National Bank in the PSB space."