There are enough dirges being sung for public sector banks, but strangely the performance of their stocks after their quarterly results does not reflect this.
Five out of the seven public sector banks that reported quarterly results on Friday made a loss and the profit-makers, State Bank of India (SBI) and Oriental Bank of Commerce, showed a worse bad loan ratio. But their shares surged, with SBI rising more than 7%, and Bank of India gaining over 10%.
Here are a few reasons why investors believe there’s value in bank stocks, despite the rash of bad loans.
Falling rate of slippages: This is one of the clearest signs that public sector banks are getting a grip on the bad loan problem. Lenders labelled a massive Rs.1.5 trillion worth of loans as non-performing in the March quarter. In the June quarter, the addition has come down to Rs.50,000 crore. This is something investors are cheering.
Provisions: Banks have provided for most of the big troubled accounts in the March quarter, courtesy the Reserve Bank of India’s asset quality review. Provisions have halved for the 25 public sector lenders in the June quarter. Sure, some more skeletons may tumble out of the cupboard. But these are unlikely to be of the magnitude of provisions made in the March quarter. What do lower provisions mean? Higher profits, of course.
Retail loan growth: Barring big banks such as SBI and Bank of Baroda, public sector lenders were slow to wake up to India’s consumption story. But now, every public sector bank has announced its plan to focus on retail lending. Rising retail consumption, which is fuelled by personal loans, could well pull them out of their credit abyss. Retail loan growth at Bank of India was 13%, at Union Bank of India 14% and that at SBI 20% in the June quarter.
Merge or perish: For the public sector lenders to survive, some will have to die. The government is more open now than before for consolidation that would create a handful of strong and valuable lenders. A start is the merger of its associates with SBI.
It will be tricky to forecast a turnaround in the fortunes of banks, although some bankers say this could happen in the first quarter of 2017-18. Barring SBI, all public sector lenders have a price-to-book value ratio of below one. Until the dust settles, these rock-bottom valuations will keep calling to investors.
The writer does not own shares in the above-mentioned companies.