PSU Banks in India : Time to Bottom Fish or More Pain Ahead

Amid concerns over Asset Quality and recovery in economy, the PSU Banks Index has declined over 50% from its high in 2015. During the week, Investors continued to dump the shares of PSU Banks to fresh 52 week low on back of poor results and sharp increase in bad loans and provisioning. In the December quarter, few of the largest Public Sector Undertaking banks have reported howler set of numbers. Punjab National Bank (PNB) reported more than 90% decline in its profit whereas Bank of Baroda (BOB) posted one of the largest quarterly losses in the history of the bank.

PSU Banks

The main reason for decline in profitability is sharp increase in provisioning by the banks on back of RBI Asset quality review audit. Banks have the window of 2 quarter to make provision for the bad loans and Most of the banks have provided for more than 50% of the bad loans in current quarter and few banks like Oriental Bank have even provided for about 80% of the loans in current quarter.

The Road Ahead for PSU Banks

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The situation can become grim for the banks in coming quarter. The banks are likely to provide for remaining of the provision under AQR in March quarter which put further stress on bank Balance sheet. With large banks like PNB, BOB and many other smaller PSU banks nearing GNPA mark of 10%; they are likely to come under RBI watch list and RBI may impose restriction on further lending till the time the NPA situation improves. If RBI imposes restriction on lending for PSU banks whose GNPA are above 10%, it will have rippled effect on the liquidity and economic growth as most PSU banks will come under restriction after March Quarter.

In my opinion, it is highly unlikely for RBI to impose blanket restriction on bank lending. The government need to recapitalize the state run bank and provide them capital at the earliest. In the upcoming budget government is likely to increase the capital infusion for the PSU bank in light current situation.  Apart from capital infusion, government also needs to take steps to boost economy and protect the local companies. The large part of bad loans is in commodity related sector and from infrastructure projects. Consider the example of SBI which has reported more than Rs 20,000 crores in fresh slippages from AQR, while regular slippages were down to Rs 5,900 crores as compared to Rs 7,000 crores in previous quarter. The fresh slippages were from few 5-6 large accounts; most of them are commodity related companies or the infrastructure project.

The imposition of minimum import price(MIP) on steel import will provide much required cushion to the steel industry in India against Chinese dumping. The MIP will result in steel price increase by about Rs 3,400/ton in coming quarter. Also government is working hard to streamline the stuck infrastructure project and provide quick clearance. It is likely that government will award about 22,000 km of road project by end of March 2016 and also clear few of the other large projects which will help companies to generate additional cash flow to meet their interest payment schedule. This will give much required boost to the PSU banks and it may result in few accounts to come out of the NPA and the actual provision required by the bank at the end of the quarter is far lower than anticipated by analyst and investor community.

Time to Bottom FishPSU Banks Pic

The stock prices for the PSU bank have corrected significantly from their highs and few of the banks are even trading below 2008 levels.  The valuations look cheap based on trailing twelve month result and few banks are trading at Price to book of 0.3. But most of the large brokerage houses are negative on the PSU banks due to large provisioning required by the banks for the bad loans in coming quarter which will impact their books significantly. If provisioning by the banks remain at elevated level which were seen in December quarter, it can significantly erode the Book value of the bank and valuations will not look attractive at current prices and there could be further decline in the prices. The bottom may not be in place for the banks in terms of result but stock price tend to bottom out 1-2 quarter ahead of the actual results. There is extreme bearishness in market for the PSU banks which can take stock price further down and this could provide opportunity for the long term investor with 3-5 year time frame to accumulate PSU banks stock at lower level.  One may look at PSU banks based on the Finance minister announcement in budget, pick up in real economic activity and bad loan situation for the overall banking sector.

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