Buy PSU bank stocks selectively: Analysts

Double trouble hit banking stocks on Wednesday after Punjab National Bank said it had detected fraudulent transactions at one of its Mumbai branches. Bank stocks had already been hit following the Reserve Bank of India’s (RBI’s) announcement of new provisioning norms for non-performing assets (NPAs).

The Nifty PSU Bank was the worst performing index on the National Stock Exchange (NSE), falling over 5 per cent. Oriental Bank of Commerce, Allahabad Bank, Bank of India, Canara Bank, Union Bank of India and State Bank of India declined 4.6 per cent to 8.4 per cent. PNB lost 10.4 per cent.

According to analysts, from a long-term perspective, the new RBI rules will help in early identification of stress and its resolution. Besides promoting better credit discipline, the move would also act a precursor to the implementation of International Financial Reporting Standards (IFRS), they added.

On the flip side, however, the new norms are likely to increase the reported NPA levels / provisioning of banks in the coming quarters. This, in turn, could keep market sentiment in check.

“Corporate banks with higher quantum of stressed/restructured assets (Canara Bank, PNB, Bank of India, Union Bank, SBI and ICICI Bank) might see a higher proportion of their bad loans drifting towards Insolvency and Bankruptcy Code

(IBC) process (failing any satisfactory resolution plan), as the upgrade / recovery chances of such tenured stressed loans remained low,” analysts at Motilal Oswal Research said.

According to reports, around ~2.8 trillion worth of loans carry a high risk of slippage into the NPA category over the next few quarters. Canara Bank, Union Bank of India and Indian Bank would have to provide over double the amount already provided for in 2018-19 as NPA provision, according to a note by Phillip Capital India Research.

As a part of the ~2.1 trillion bank recapitalisation plan spread over 2017-18 and 2018- Indian Bank

Canara Bank

Union Bank of India Punjab National Bank Axis Bank

ICICI Bank

Bank of Baroda Oriental Bank of Commerce State Bank of India Loan Stressed Addl provision book loan (% of FY19 NPA (~ bn) (~ bn) provision) 1,483 88 4,597 5,669 3,994 18,262 19, the government recently announced ~881.39 billion capital infusion into 20 public sector banks (PSBs) during the current financial year, with IDBI Bank cornering a lion's share of ~106.1 billion.

Though a majority of experts remained bullish on the banking space from a long-term perspective, they felt that the recent developments could be short-term negative for the sector. Against this backdrop, they advise investors to be selective and buy only those banks with manageable NPA levels and visible credit growth/earnings.

“NPAs are inherited problems from the past and the provisions augur well in clearing up the mess. One can look at bargain hunting in these counters. There are banks that have been able to maintain asset quality, which is above the industry average. Those that are able to grow business and have manageable NPA levels should be on investors' shopping lists,” according to G Chokkalingam, founder and managing director at Equinomics Research.

Till date in the current financial year, most public

3,731 2,937 4,521 1,625 505 sector banking (PSB) stocks have underperformed the frontline benchmarks. Oriental Bank of Commerce, Union Bank of India, Allahabad Bank, IDBI Bank and Syndicate Bank have been among the worst performers — falling up to 20 per cent during this period. In comparison, the S&P BSE Sensex has gained around 15 per cent, while the S&P BSE Bankex has moved up nearly 19 per cent.

Regarding PNB, analysts suggested that investors should stay away for now since the stock could go further down in future.

“Such events are rare and it is difficult to predict where the fall will end. It will be a tough task for the stock to stage a sharp recovery from here. Investors should stay away from this counter for now,” advised Rakesh Kumar, an analyst tracking the banking sector at Elara Securities.

Analysts at Motilal Oswal favour SBI, ICICI Bank and Bank of Baroda among corporate banks, given their strong asset quality.

Edelweiss and Kotak also stand to gain from the RBI guidelines since they are active and are hoping to get more aggressive in the asset reconstruction business, according to analysts at Morgan Stanley.

According to reports, around ~2.8 trillion worth of loans carry a high risk of slippage into the NPA category over the next few quarters