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

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.