PSU bank stocks set for a jump

2019 may be a year of growth for state-run banks after a three-year gap, say an­a­lysts

Business Standard - - FRONT PAGE - HAMSINI KARTHIK

2019 may be a year of growth for state-run banks after a three-year gap, say an­a­lysts. HAMSINI KARTHIK writes

The pub­lic sec­tor bank (PSB) stocks seem to have started off the year on a pos­i­tive note. The gov­ern­ment’s com­mit­ment to in­fuse cap­i­tal, a strong trend vis­i­ble on bad loan re­cov­er­ies and favourable bond mar­ket con­di­tions place PSBs in a bet­ter po­si­tion to ex­pand their fi­nan­cials more mean­ing­fully. In other words, an­a­lysts say 2019 may be a year of growth for a ma­jor­ity of state-owned banks, par­tic­u­larly for the larger ones. They be­lieve that after be­ing favoured purely for their rel­a­tively low val­u­a­tions since 2015, the cur­rent year may pan out dif­fer­ently.

While top names such as State Bank of In­dia (SBI) and Bank of Bar­oda (BoB) are the pre­ferred ‘buys’ for most brokerages, sen­ti­ments are turn­ing pos­i­tive even for smaller peers such as Ca­nara Bank and Union Bank of In­dia. “After be­ing neg­a­tive on PSBs for three years, sig­nals are now turn­ing pos­i­tive,” says Sid­dharth Puro­hit of SMC Cap­i­tal. “We are com­ing to a stage where valu­a­tion gap is clos­ing down,” he adds.

His con­fi­dence largely stems from the fact that banks are now at the peak of a bad loan recog­ni­tion cy­cle and the days ahead favour the cur­rent trend of loan re­cov­ery to strengthen. The Septem­ber quar­ter re­sults gave an in­di­ca­tion that the stress in the sys­tem was cool­ing off a bit. Pro­vi­sion­ing costs and slip­pages sig­nif­i­cantly re­duced for PSBs and go­ing into the De­cem­ber quar­ter, an­a­lysts at Deutsche Bank feel these banks will also get help from soft­en­ing bond yields, a point which was a drag on their fi­nan­cials from April 2018. PSBs will re­port big trea­sury gains, which will pro­vide sup­port to earn­ings, they say.

The sup­port that PSBs get from loan re­cov­er­ies will add up as an im­por­tant com­po­nent to their fi­nan­cials in 2019. This was, in fact, the fac­tor that brought them into fo­cus around mid2018. The lat­est re­port by the RBI says PSBs have re­cov­ered over ~60,000 crore from bad loan ac­counts in from April to Septem­ber last year. Nilesh Shah, MD & CEO, En­vi­sion Cap­i­tal, says with PSBs ex­ud­ing con­fi­dence in re­cov­er­ing bad loans, the trend should well con­tinue in 2019.

The en­hanced ~1.06-tril­lion PSB re­cap­i­tal­i­sa­tion plan, along with ~41,000 crore of ad­di­tional in­fu­sion, also boosts con­fi­dence and the days of steep loan write­offs and pro­vi­sion­ing are well be­hind these banks. “I ex­pect a rea­son­able amount of cap­i­tal to go to­wards the growth of PSBs, given the im­prove­ment in lend­ing ac­tiv­i­ties,” Puro­hit points out.

As for in­di­vid­ual stocks, Mor­gan Stan­ley, which is bullish on SBI, says the bank is en­ter­ing a pe­riod of fall­ing pro­vi­sions, stronger loan growth, higher profitabil­ity and con­trolled costs — fac­tors that aren’t priced into its stock price. As for BoB, with the over­hangs of im­pend­ing merger largely set­tled, an­a­lysts at Prab­hu­das Lil­lad­her say op­er­a­tional as­pects are fall­ing in place.

The smaller banks, Ca­nara and Union, too, may see height­ened in­vestor pref­er­ence in go­ing for­ward. Like their larger peers, as­set qual­ity im­prove­ment is ev­i­dent for both and with cap­i­tal-re­lated is­sues be­ing ad­dressed, an­a­lysts say they are poised for bet­ter days. For Union Bank, No­mura points out that its core op­er­at­ing profit is sta­bil­is­ing and the bank should clock 10 per cent op­er­at­ing profit growth. As for Ca­nara Bank, an­a­lysts at JM Fi­nan­cial, who have a ‘hold’ rec­om­men­da­tion on the stock, feel that its gran­u­lar re­tail loans ex­po­sure and its strong growth trends are its ad­van­tages. They say the bank’s bal­ance sheet growth has out­paced that of peers in the first half of FY19.

The only weak link among PSBs now is Pun­jab Na­tional Bank. Hav­ing caught neck-deep into scams that shook the bank last year, re­gain­ing the Street's con­fi­dence may be a long drawn process.

That said, PSBs have rel­a­tively higher ex­po­sure to the be­lea­guered in­fra­struc­ture group — IL&FS and the power sec­tor. There­fore, as­set qual­ity could once again be dis­turbed if fresh con­cerns emerge from the two pock­ets.

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