PSU banks on a roll; SBI becomes most valued PSU

Shares of public sector banks (PSBs) were in focus on Tuesday with the Nifty PSU Bank index hitting 52-week high on the National Stock Exchange (NSE) in intra-day trade.

Bank of India (BOI) and Oriental Bank of Commerce were up more than 3% each, hitting their respective 52-week high on the NSE. Among other stocks, Union Bank of India, Punjab National Bank, Andhra Bank, Syndicate Bank, Bank of Baroda (BOB), Canara Bank and Allahabad Bank from the index gained 2% to 3%.

Meanwhile State Bank of India (SBI) that gained 2% to Rs 296 levels on Tuesday became the most valued PSU by market capitalisation (m-cap). Thus far in the calendar year 2017 (CY17), SBI has outperformed the market with over 18% rise, as against 11.5% gain in the benchmark index.

At 10:31 am; the Nifty PSU Bank index was up 2.9% at 3,598. It hit an intra-day high of 3,608.70, and surpassed its previous high of 3,595.80 touched on April 5, 2017. By comparison, the benchmark Nifty 50 index, Nifty Bank and Nifty Private Bank indices were up 1% each.

The rally, analysts say, has largely been fuelled by the recent Reserve Bank of India’s (RBI’s) action plan on Prompt Corrective Action (PCA) and an improvement in operational and financial performance over the next few quarters. 

As per the PCA plan, any bank with a net non-performing assets (NPA) ratio of 6% or more, as of March 2017, will come under the scanner of the RBI, which can then direct the bank on how to go about its business.

“Given the recent RBI move on PCA and bad assets, this could well be the last quarter when the banks report high level of non-performing assets (NPAs). The results and the commentary, going forward, will be better than what banks had been reporting in the past,” says A K Prabhakar, head of research at IDBI Capital.

However, analysts also point out that the overall profitability of the banking sector in March quarter (Q4FY17) will optically look better on year-on-year (y-o-y) basis because of a very low base which can be attributed to implementation of AQR (asset quality review) in 4QFY16.

“Against the backdrop of slower economic recovery, higher debt leverage and muted credit growth, fresh loan slippage is seen at an elevated level, although lower than that of the previous quarter. The RBI’s forbearance on classification of assets will provide cushion against any spike in non-performing assets or NPAs in retail and SME categories,” analysts at Nirmal Bang Institutional Equities said in results preview note.

So what should you do with banking stocks then? Given the developments, though analysts remain positive on the road ahead for this sector, they suggest that investors should remain choosy and invest only where there is earnings visibility coupled with low NPAs. 

“Most investors while acknowledging the better long-term fundamentals were somewhat concerned with the lack of earnings growth and premium valuation of the sector, in line with our assessment. While the liquidity inflow to DIIs could remain high in the near term, we don’t see the current environment as a good opportunity for adding to the stocks. SBI is our key buy recommendation within banks,” says Nilanjan Karfa of Jefferies in a co-authored March 27 report with Avinash Singh.

Prabhakar of IDBI Capital, on the other hand, remains positive on SBI and Canara Bank, and sees a limited downside for these stocks from the current levels.