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Business News/ Industry / Public sector banks find few takers even as valuations fall
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Public sector banks find few takers even as valuations fall

With the economy failing to pick up at the expected pace and RBI flagging concerns around bad loans, these stocks have started to slide again

According to data from investment research and management firm Morningstar Inc., only one state-run bank, SBI, figures in a list of the top 10 stocks in terms of the number of schemes holding them. Photo: Pradeep Gaur/MintPremium
According to data from investment research and management firm Morningstar Inc., only one state-run bank, SBI, figures in a list of the top 10 stocks in terms of the number of schemes holding them. Photo: Pradeep Gaur/Mint

Mumbai: Fund managers continue to remain negative on stocks of public sector banks despite optimism earlier in the year around the peaking of the bad loan cycle.

With the economy failing to pick up at the expected pace and the Reserve Bank of India flagging continuing concerns around bad loans, these stocks have started to slide again.

The National Stock Exchange’s (NSE’s) CNX PSU Bank index hit a 52-week low on Tuesday, and even though valuations look cheap, the space is still not attractive enough, given the magnitude of issues facing state-run banks.

While NSE’s CNX Nifty has declined 2.31% year to date, the PSU Bank index is down a whopping 25.8% so far in 2015. Of the 19 listed state-run banks, 15 recorded their lowest level in a year since last week, pulling down their valuations.

Public sector banks trade at a price-to-book value (P/BV) in the range of 0.41-1.18 times, with only State Bank of India (SBI) trading above a valuation of 1x. In comparison, private sector banks trade at P/BV of 0.74-4.5 times.

Data on foreign institutional investors’ (FIIs’) holdings shows that foreign investors cut their exposure to public sector bank stocks in the quarter ended March to 10.33% from 10.74% a quarter before. On the other hand, DIIs’ (domestic institutional investors’) stake in this pack inched up to 14.03% from 13.41% a quarter before. But currently there seem to be hardly any takers for the stocks.

According to a few senior domestic fund managers, while they are not selling public sector bank stocks, they are not looking to add these stocks to their portfolio either, despite the government trying to introduce reforms.

“We are negative on the PSU (public sector) banks pack. The concerns are well known—the asset quality issue and the recapitalization issue," said Harsha Upadhyaya, chief investment officer (CIO)-equity at Kotak Mahindra Asset Management Co. Ltd. The balance sheet of public sector banks, he added, is in a lot of stress, and they won’t be able to capture incremental market share, unlike their private sector peers, when credit growth picks up.

According to data from investment research and management firm Morningstar Inc., only one state-run bank, SBI, figures in a list of the top 10 stocks in terms of the number of schemes holding them. SBI comes in at seventh place. Of the rest, the top three positions are held by private sector banks—HDFC Bank Ltd, ICICI Bank Ltd and Axis Bank Ltd.

“PSU banks are going through a challenging phase. Their asset quality is going through reasonable stress," said Anand Radhakrishnan, CIO Franklin Equity at Franklin Templeton Investments India Pvt. Ltd.

He said that unless it was known how these banks or those people who have borrowed money from them are going to come out of the trouble they are in with certainty, it becomes a bit of a speculative bet rather than a well-thought-out move.

Public sector banks fared poorly when it came to the March quarter report cards, and asset quality stress remained elevated for most banks led by the closure of the restructuring window, but there lies some hope ahead, said brokerages.

A report by Motilal Oswal Financial Services Ltd said that gross stress additions increased to 62,700 crore (7.8% of loans annualized) from 41,300 crore (5.4%) a quarter ago.

“Moderate recovery and removal of asset classification forbearance on restructuring is likely to translate into elevated slippages for next 1-2 quarters in turn impacting profitability improvement for most banks. Conducive liquidity and expected improvement in growth would lead to acceleration in corporate de-leveraging and decline in overall asset quality pressure in 2HFY16," Motilal Oswal analysts said in a report earlier this month.

An interesting data point here is that the aggregate market value of the top three public sector banks—SBI, Bank of Baroda and Punjab National Bank— adds up to 2.49 trillion, which is less than the market cap of the top private bank by market capitalization—HDFC Bank—which stands at 2.52 trillion.

Meanwhile, on the derivatives front as well, things don’t look very promising for state-owned banks. “In the F&O (futures and options) market, there has been light activity in general," said Yogesh Radke, head of quantitative research at Edelweiss Securities Ltd. “We saw some shorts coming in for Bank Nifty. There is a huge amount of volatility in PSU bank stocks. They are being used for trading purposes. Clearly volumes are there, but positions are squared off."

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Published: 18 Jun 2015, 01:08 AM IST
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