Mumbai: Fund managers are refusing to load up on stocks of state-run banks even at beaten down valuations, frustrated by their weak balance sheets and structural problems, although analysts appear to be a tad more confident about them, if buy ratings are anything to go by.

There are more buy ratings for most-tracked Indian state-run banks, with the exception of fraud-hit Punjab National Bank (PNB) now, than there were a week after the bank recapitalization plan was announced in October, data from Bloomberg showed.

Even the government’s record Rs2.11-trillion plan provided little incentive for fund managers to buy into these stocks as structural issues such as asset quality problems, inability to attract and motivate right talent, continue to ail the sector.

“In the PSU (public sector undertaking) banking sector—there are two structural problems. The compensation of top management which makes it difficult to attract and motivate talent, and external influence in the decision making, that has led to asset-related problems," said Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd.

The ratings as of 1 November were considered for comparison, to capture brokerage views post the recapitalisation announcement on 24 October.

Top lender State Bank of India (SBI) was the most-tracked bank with 49 analysts covering the stock. It had 83.7% buy or outperform ratings of the total ratings, compared with 77.3% on 1 November.

Following next was Bank of Baroda, which had 75% buy or outperform ratings, compared with 58.1% on 1 November.

On 14 February, PNB said it had discovered a fraud of Rs11,400 crore, and later revised to Rs12,636 crore.

PNB’s stock has slumped 37.5% since the fraud was made public earlier this month. It touched a 20-month low of Rs92 on Tuesday.

The recent $2 billion fraud at PNB was another negative, though fund managers said they weren’t surprised given the basic issues these banks grapple with.

Shah said he has been underweight on PSU banks relatively, but not at a complete zero.

“They are a trading opportunity and not an investment opportunity. They cannot be ignored though as they are part of the indices," said Shah. “There has not been much change our stance since the PNB scam got public. It did not come as a surprise."

SBI was the only state-run bank among top 10 holdings in the large-cap space of mutual funds at the end of January, data from Morningstar Inc. showed. There were no state-run banks in the top 10 small- and mid-cap holdings of the fund houses.

However, asset quality is a haunting worry for SBI too. It reported a net loss of Rs2,416 crore for the fiscal third quarter after setting aside funds to cover rising bad loans and losses on its bond portfolio.

“I had never changed my stance on PSU Banks, and have no exposure to it," said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd.

The recap plan didn’t change that, as it was more of an emergency measure to address the symptoms but underlying causes needed a far wider toolkit.

Bodke said the recap plan needed to be followed by many structural reforms like increased autonomy in hiring talent, strengthening credit appraisal skills by enhancing domain expertise, bringing about an attitudinal change in employees like their private sector counterparts by focusing on sales and marketing rather than relying on walk-ins and above all by expediting rapid consolidation in the fragmented state-run space.

“It brings to the front all the core issues that PSUs are facing," Bodke said on the PNB fraud.

Of all the listed state-run banks, only three—IDBI Bank Ltd, Indian Bank and SBI—have logged gains since the recapitalisation announcement was made on 24 October.

In comparison, BSE Bankex and Sensex rose 3.76% and 4.41%, respectively.

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